U.K.-based financial services company Barclays plc (BCS, BARC.L) said Monday that it has decided not to participate in the U.K. government's Asset Protection Scheme, a scheme designed to insure the so-called toxic assets of banks, following discussions with major shareholders. The company also said that talks regarding the potential sale of its iShares business with several interested parties were progressing well.
In a statement, Barclays said, Following further careful assessment and discussions with major shareholders, the Board of Barclays has determined that it would not be in the interests of its investors, depositors and clients to participate in the APS.
The move also follows an announcement by Barclays on Friday that it passed a stress test to its balance sheet by the U.K. Financial Services Authority, or FSA, indicating that it may not need more money from the government. The FSA also applied a detailed stress test to the bank's profit-and-loss account, which indicated that the bank continued to meet capital requirements and could endure severe economic weakness without raising fresh cash to bolster its capital base.
Barclays' decision is seen as a bold bet on its ability to weather the economic downturn without government support. However, it also means that the company remains free of government interference, unlike its peers like Lloyds Banking Group plc (LYG, LLOY.L) and Royal Bank of Scotland Group plc (RBS, RBS.L), which have ended up giving large controlling stakes to the government as the price of participation in the APS.
The APS uses government money to insure banks' riskiest assets, such as mortgage-backed bonds and other securities, against further losses. The Treasury charges a fee for the insurance that it will provide. Barclays had time until Tuesday to decide whether to sign up to the APS to insure it against major losses from bad assets.
In the APS, Lloyds Banking Group and Royal Bank of Scotland Group plc have applied to insure a total of GBP 585 billion-worth of assets. In February, RBS confirmed its participation in APS, in conjunction with an additional capital raising of GBP 13 billion. The bank intends to participate in the scheme in respect of assets with a par value of GBP 325 billion and a carrying value net of impairments and write-downs of GBP 302 billion.
Although the APS is expected to help Barclays limit future losses, the cost to participate in the plan could deplete the company's capital cushion, considered a key measure of its financial strength. Signing up for the APS calls for greater government control on the banks, includes a legal requirement to increase lending to homeowners and businesses, and also sets controls on executive pay and bonuses.
Barclays is now expected by analysts to raise money by selling assets or issuing shares in a bid to shore up its capital. The bank had earlier said it wants to avoid the issue of shares to the U.K. government as it wants to maintain commercial independence. Also, internal calculations by the bank have reportedly showed that it could absorb up to GBP 17 billion in losses before it would be required to raise new capital.
In a bid to boost its capital without issuing shares, Barclays is in talks to sell the San Francisco-based exchange-traded-funds business iShares, which is expected to fetch $5 billion or more.
Barclays confirmed on Monday that talks regarding the potential sale of the company's iShares business were progressing well. The sale of the company's exchange-trade funded business, which is part of its asset management division, is also expected to help avoid the company turning to the U.K. government for help.
In response to media reports regarding the potential sale of iShares, Barclays had confirmed in mid-March that it is in discussions with a number of potentially interested parties, adding that its board, however, has not taken any decision regarding the disposal of any business.
iShares account for a quarter of the $1 trillion fund management business of BGI. Investors have continued to pour cash into these funds, which track indexes ranging from big-company U.S. stocks, to bonds, commodities and real estate. Barclays took in $56.3 billion in new assets in 2008, slightly down from the 2007 total, giving it $254.7 billion in assets.
Barclays is reportedly in talks with several American institutions and private equity investors interested in buying the iShares division.
Towards the end of 2008, Barclays raised about GBP 7 billion chiefly from Qatari and Abu Dhabi funds, in an effort to avoid capital injection from the government and to strengthen its capital reserves, which was depleted by write-downs. However, the move generated a lot of controversy as it diluted existing shareholders and was considered more expensive than capital injection by the government. A clause in the contract with the Middle Eastern investors made it difficult for the U.K. government to take a stake in Barclays.
BCS closed Monday's regular trading session on the NYSE at $8.26, down $1.63 or 16.48% on a volume of 11.49 million shares. The stock has been trading in a range of $2.75-$40.30 in the past 52 weeks.
On the LSE, BARC.L closed Monday's regular trading session at 149.10 pence, down 24.7 pence on a volume of 197.56 million shares. In the past 52 weeks, the stock has been trading in a range of 47.30-512.50 pence.
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