Barclays Go It Alone, But Will They Come To Regret It?
After passing the government stress test that asserted that they could weather the ongoing financial mistral, Barclays have decided to man up and shun the asset protection scheme that Alastair Darling worked out for them and all the other banks who have taken a knock during the recession. They’re assuming that the pros (pleased investors, less interference from government) will outweigh the potential cons (having bad assets swallow up their capital).
The instant reaction was a 7p increase in the share price, suggesting investors see it as somewhere that will pay them dividends rather than be in thrall to government for years to come. So investor confidence is high. Or is it?
Societe Generale has downgraded the bank, suggesting that investors sell on their shares. Their beef is with Barclays’ capital ratio, the indicator of how much free cash an institution has in relation to their assets, loans and so on. It’s currently at below 7%, compared with the mid-teens ratios enjoyed by the recapitalised likes of Lloyds. With the ratio so low, there are worries that Barclays won’t be strong enough to grow or develop, and are left dangerously open to further writedowns off the back of bad assets. Societe Generale’s view is that there’s a 90% chance they’ll need to go back to the government for more funds anyway.
Other investors, like Sandy Chen at Panmure Gordon who spoke to the Guardian, are equally wary: “By not participating in the APS, Barclays is leaving itself exposed to “fat tail” risks on its book [i.e. unpredictable events occuring during great financial upheaval] – these will occur more frequently in an environment of sharply rising corporate default rates. And the details of the FSA stress test are scant”.
Nomura feel the same: “We remain concerned about the balance sheet exposures to risky assets where uncertainties are likely to persist”. And Seven Investment Management too: “The question is whether to believe the outlook, and that its loan book and collateralized debt obligations won’t come back to haunt it”. So Barclays have to make sure they get their capital back on track, so that even in a worst case scenario of bad assets, it’ll still be above water.
The next big date for Barclays is this Friday, when the bids for their iShares business have to be in - so the sale of the unit really wasn’t designed to directly fund the asset-insurance plan as we previously mused, but will certainly be a much-needed boost to their capital ratio. But if you were thinking of splurging that £2-5bn (depending on who you talk to) that you’ve got under the mattress, you may already be too late – news of an exclusive £3bn deal with CVC has leaked this morning.
Then after that there’s the shareholder AGM on the 23rd, where the entire board is up for re-election. Presumably they’ll wait until after that to do anything controversial like a rights issue that would dilute investors’ holdings in the bank even further – though that’s still a possible capital option for them, as well as getting more private finance on board, something that would piss the shareholders off even more than a rights issue. But no doubt Roger Jenkins is flicking through his Middle Eastern Rolodex as we speak, to find someone to fire sweet nothings at…
Posted by Ben Beaumont-Thomas in Hot Money | March 31, 2009 2:12PM |