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The financial regulator wants to see the bank’s leverage ratio upped by half a point to 3% by June 2014, so the bank has responded with a monster share issue, priced at 185p a share, which is around 40% below the closing mid-market price of Barclays on the day before the rights issue was announced.
The shares will be offered to shareholders on the basis of one new share for every four shares currently held.
“After careful consideration of the options to meet the PRA request for a 3% leverage ratio by June 2014, the board has decided on a set of actions, including the rights issue, to meet this target, whilst continuing to deliver our strategy under the Transform programme. The PRA has agreed and welcomes our plan,” revealed Sir David Walker, Barclays’ chairman.
Market observers believe Barclays had been asking for an extra year to achieve the leverage ratio target under its own steam.
As well as issuing shares, Barclays has agreed to take further actions to keep the PRA sweet; these include the raising of up to £2bn of CRD (capital requirements directive) IV qualifying additional Tier 1 securities with a 7% fully loaded CET1 (common equity tier 1) trigger, which the PRA has confirmed can be used in the PRA leverage ratio calculation.
Translated into English, that means the bank is issuing £2bn of contingent convertible (CoCo) bonds that could convert into equity or become worthless if the bank runs into trouble.
“Five of our six Transform financial targets remain unchanged, or have accelerated timescales. There is a modest delay in the RoE [return on equity] target as a consequence of these plans. However, we believe Barclays will be stronger for taking decisive action today,” said Antony Jenkins, Barclays’ chief executive.
The Transform programme was announced by Barclays on 12 February 2013 and represents the company's strategy over the medium term under its new management.
Barclays has also agreed to reduce CRD IV leverage exposure by £65bn to £80bn to around £1,500bn through low execution risk management actions that have already been identified by the board.
Share price reaction to the news was negative, even though the fund raising had been flagged on Monday, when the shares fell 3.5%. The shares were down another 6.5% to 288.9p in lunch-time trading.
Part of Tuesday’s adverse share price reaction may be down to the half-year results, which contained a number of chunky one-off provisions.
The banking giant made a £1.34bn provision relating to payment protection insurance mis-selling claims (2012: £300mln), and a £650mln ((2012: £450mln) provision relating to mis-selling of interest rate hedging products.
Barclays said £640mln of costs to achieve its Transform programme largely accounted for adjusted profit before tax tumbling 17% to £3.59bn from £4.34bn in the first half of 2012.
Numis Securities said the results “look light vs. consensus”, with Investment Bank (IB) income “slightly disappointing” at £6.47bn versus a consensus expectation of £15.14bn.
Oriel Securities, meanwhile, is rethinking its ‘buy’ rating.
“£2bn of legacy misconduct provisions (PPI and swaps) was significantly greater than we were expecting. IB performance, barring equities, was weak vs. the US peer group,” Oriel noted,
Credit impairment charges were down 5% to £1.63bn but were above the £1.55bn expected by the market.
The bank declared a second quarter dividend of 1p, and expects to repeat that payment in the final two quarters of the year. From 2013, the board anticipates paying out between 40% and 50% of retained earnings in dividends, which would represent not only a bigger pay-out than previously indicated, but would kick in a year earlier than under the original Transform schedule.
“We continue to remain cautious about the environment in which we operate and our focus remains on costs, capital, leverage and returns to drive sustainable performance improvements,” Barclays said.