Early applause for the £4.5bn Barclays share issue began to fade mid-morning on Wednesday as analysts filed into a conference fronted by John Varley at Barclays HQ in London’s Canary Wharf.
Note the sceptics:
- Temasek and China Development Bank have effectively refused to stump up extra cash. Their involvement in the issue is effectively limited to them taking up their rights to avoid dilution.
- Why does Barclays make reference to proforma end-2007 ratios when describing its capital strength? The bank has already admitted that ratios have weakened significantly this year…
- The fact remains that if Barclays were to apply the same marks as, say, RBS, the bank would probably need £8bn, not £4.5bn.
- And if there are more writedowns to come (as everyone expects), why not declare them now and get it over with? (Because they would absorb all the new cash, analysts suspect.)
That said, the initial published investment research was broadly positive. A selection:
Arturo De Frias, Dresdner Kleinwort
It was “not if but when”… and Barclays finally launched a £4.5bn capital raising. We were expecting £4bn and hence we cut our EPS very slightly, 3% in 2008 and 4% in 2009. This is clearly good news but we retain our Hold recommendation as we are still awaiting clarity on further writedowns. We are forecasting £3bn vs. the £1.7bn taken so far this year and the absence of any mention surprises us.
Jason Napier, Deutsche Bank
We expect the conference call will be positive on current trading and future prospects. No increase in risk asset impairments were flagged - though we expect there to be more disclosure and slightly higher provisions to be reflected in the prospectus to be released today.
Barclays have done well in our view to raise significant amounts of capital on these terms. We calculate 17% dilution to our 2009 EPS, placing the stock on 4.9x 2009 EPS. The undertaking to pay a 34p cash dividend equates to an 11% dividend yield which, against the backdrop of scrip interim dividends at HBOS and RBS, is a strong performance. We regard the share as too cheap given current trading and recapitalised status. Buy.
John-Paul Crutchley at Merrill Lynch
The issue will strengthen Barclays’ capital base and provide resources to fund future growth. On a pro-forma Basel II basis, it would have increased December 2007 tier 1 and core tier 1 ratios to 8.8% and 6.3%, versus the reported 7.6% and 5.1% respectively.
Bruce Packard, Pali International
The structure of this deal shows it is becoming more difficult to raise capital from SWF and other Eastern Investors. Notably CDB is only investing £136m. Although it is not mentioned in the statement we think it is highly likely that the FSA and the BoE have demanded BARC raises capital, even though they were seemingly happy with previous targets. If this is true, we should perhaps not be too hard on bank’s management, but from an investment point of view regulators appear to have taken a whimsically pro-cyclical view of excess capital.
Despite raising £4.5bn of new equity Economic Profit goals (£9.3bn-£10.6bn cumulative 2008-2011) remain unchanged - this is significant because EP methodology uses accounting profits but subtracts a percentage charge for cost of equity, suggesting BARC believes that profitability is not going to decline despite raising enlarging equity base by 20%. We are sceptical about this, particularly given the outlook for the industry over the next couple of years. Or put another way existing shareholders are being diluted by 20%, but the EP target remains unchanged - shareholder value creation and EP target are not the same thing. Our REC on BARC is Neutral, TP 420p.
James Chappell, Goldman Sachs
Adjusted for the capital raised, Barclays trades on 6.5x 2009E GS EPS and 1.2x 2008E tangible book compared to the UK Banks on 6.2x and 1.0x, respectively. We have a 12-month SOTP-derived price target of 390p. Key risks to our view include lower impairments than forecast, better capital markets revenues than forecast or higher margins.
Alex Potter, Collins Stewart
This equity issue removes uncertainty and, as we wrote on 16th June “…confirmation of terms would be an upgrade event”. We feel that the valuation is undemanding, the dividend outlook is good news, as is the lack of any earnings guidance downgrade. Following this, we have a strongly capitalised bank which was the key bear point, we feel, and will be reviewing our recommendation following the analysts meeting at 10:00 London time.
Related links
Barclays brings Qatar and Sumitomo Mitsui on board as it raises £4.5bn - FT Alphaville
Barlcays statement
Barclays unveils £4.5bn share sale - FT.com
