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Setting the benchmark in corporate integrity

Barclay’s share sale to plug capital hole

Barclay’s must raise £12.8bn to cover new regulatory demands

Barclay’s bank is set to issue a total of £5.8bn in new shares in order to cover a massive capital shortfall. A further £2bn in bonds will also be issued. These are designed to revert into shares or be completely wiped out if the bank faces trouble. The new shares and bonds are designed to cover a shortfall in the new leverage ratio requirement imposed by the Prudential Regulatory Authority (PRA).


Barclay’s plans to conduct the share sales as a rights issue, offering current shareholders to purchase new shares at a discounted price. The bank plans to top up its balance sheet by £12.8bn while simultaneously reducing the amount of risky assets. The bank insists these measures are designed to support its planned level of lending growth. The figure comes from the PRA’s new requirement that British banks raise their liquidity ratios to three percent.

Barclay’s has also recently announced that its underlying pre-tax profit was down by 17 percent for the first half of 2013. That figures excludes the £2bn provisions to cover mis-selling and the £1.35bn fund to cover payment protection insurance claims.

CEO Anthony Jenkins had been a vociferous critic of the fresh capital requirements being imposed by regulators, and had suggested that Barclay’s might be forced to scale back its lending in order to comply. In an about-turn, he added that he is “certain the decisive and prompt action [they] are taking will leave Barclay’s stronger.” He also described the new fundraising round as a “bold but balanced plan” that will allow the bank to meet regulatory demands by next year, and would not impact on its plan to increase lending to businesses and households.

Analysts have been less optimistic, suggesting that Barclay’s has struggled to keep its share prices high. In the immediate aftermath of the share sale announcement, prices dropped close to five percent, as investors recoiled at the higher than expected rights issue. There are concerns that Barclay’s is shifting the onus of its capital responsibilities on to its shareholders.  However, Jenkins has insisted that shareholders would be rewarded soon. “The board and I are aware of the implications of a rights issue for shareholders. We hope to balance this with reduced uncertainty in the outlook for Barclays and with enhancement of our dividend payout from 2014.”

There has been some criticism of the PRA for creating a difficult regulatory environment in which banks like Barclay’s can flourish. Jenkins argued against the PRA guidelines just last month saying new requirements might force Barclay’s to reconsider some of its business. David Cumming, head of equities at Standard Life, agrees suggesting the plans are damaging to banks. “From a taxpayers and investors viewpoint, this must change,” he told The Guardian. “If not, funding available for business both large and small will be reduced, while funds realised from future government share sales will be materially below the levels achievable if we had a more objective and coherent regulatory policy.”

 

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