Barclays weathers capital storm, eyes bigger prize

By @ibtimes on

A pending asset sale and a clean bill of health from its financial regulator has calmed fears Barclays will need to raise cash, and backed up the bank's pledge to emerge as a victor from the financial crisis.

Barclays Chief Executive John Varley says its acquisition of Lehman Brothers in the United States, avoiding UK government intrusion, decent risk management and nimble capital management will bear fruit when economies turn.

A jump in bad debts is inevitable as recession deepens and worries about balance sheets and depressed returns are unlikely to fade fast for the bank or the industry. Those concerns and a breakdown in investor trust sent Barclays shares skidding to a 22-year low in January.

However, the stock is up more than 140 percent in the past month as good news has prompted a rethink.

It has become a materially better investment, said Edward Collins, fund manager at New Star Asset Management.

If you've been uncertain and you want something that's an improving situation where you can begin to draw a line under the problems, then Barclays ticks that box, he said.

Barclays has long had big ambitions. In 2005 it aimed to be one of the world's top five banks, and its pursuit of Dutch bank ABN AMRO in 2007 showed its mindset.

Missing out on ABN proved a lucky escape and the financial crisis is likely to have dampened dealmaking ambitions, but Varley is confident he can grab business from banks retreating from Wall Street and deliver better returns than rivals.

The regulator's endorsement that Barclays' capital cushion can withstand a severe recession removed fears the bank could need to sell a stake to government and can improve its capital position on its terms, analysts said.

The sale of asset management unit iShares to private equity firm CVC is expected for about 3 billion pounds, possibly as early as Thursday, and capital could get a further lift by swapping low-ranked bonds for higher quality notes, which Barclays is considering, following similar moves by rivals.

Barclays also has far less exposure than part-nationalized rivals Royal Bank of Scotland and Lloyds Banking Group to corporate and higher risk home loans, which are rapidly deteriorating.

Bad debts at RBS and Lloyds are likely to peak at 3.5 percent of loans during the recession, compared with 2.2 percent at Barclays given its higher quality loan book, Bernstein analyst Bruno Paulson said.

ONCE BITTEN...

Barclays' less risky loan book is most evident in its limited exposure to commercial real estate lending, which Paulson said for UK banks was the scariest ogre of all in this crisis.

The London-based bank suffered massive property loan losses in the early 1990s, so stayed wary of the sector during the latest boom, while rivals such as HBOS piled in.

An improvement in capital markets has aided confidence that revenues at investment bank arm Barclays Capital will hold up and it will see benefits from last year's Lehman deal.

Barclays, through its Lehman acquisition, is building a franchise capable of benefiting from the retrenchment of its competitors and taking advantage of the wider margin, less asset-intensive operating environment that is now emerging, Exane BNP Paribas analyst Ian Gordon said.

In this respect, it is unique among UK banks.

Headwinds do remain on the horizon, however.

Bad debts will still rise sharply as recession deepens and the bank's exposure to monoline insurers remains a big concern.

Its capital ratio is well below all its UK rivals. A core tier 1 capital ratio of 6.7 percent at end-December should improve to near 7.3 percent with the iShares deal.

That would be toward the low end of where other banks are but they are profitable and generating revenues to absorb losses from profit and not just capital, said Jane Coffey, head of equities at Royal London Asset Management, which holds Barclays.

Lloyds' core tier 1 ratio has jumped to 14.5 percent and RBS's went to 12.4 percent after they insured assets under a UK government-backed scheme, and HSBC's rose to 8.5 percent after its rights issue.

Both RBS and Lloyds are expected to stay in the red this year and maybe next, eating into that capital.

Barclays made a 6.1 billion pound profit last year, despite 8 billion pounds of writedowns, and is expected to post a profit of 2.6 billion this year, the average forecast at Reuters Estimates showed.

Its recent share rally may also temper enthusiasm -- New Star's Collins said he wouldn't chase the stock at current levels -- while returns across the sector may not be much above the cost of capital as banks are told to hold more capital, reduce leverage and face more intrusive regulation.

Yet the recent rally appears likely to have drawn the sting from an investor backlash that built last October and simmered until early this year.

Management, particularly Chairman Marcus Agius, were braced for a rough ride from shareholders at its annual meeting on April 23, but a substantial investor revolt now seems unlikely.

(Editing by Andrew Macdonald)

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