Note the update to this post here.
New disclosure from US investment banks show Tier 1 ratios in excess of 10%. Capitalising Barclays Capital at a similar level would not only require virtually all of the group’s equity but would drive returns below the cost of capital.
Adding grist to that old adage, it takes one to know one, Citi analysts, in a note to clients on Friday, are looking at an undercapitalised bank. Barclays.
And though the analyst in question - Tom Rayner - has some form when it comes to BARC bashing, the stock was still off 3 per cent on Friday morning.
According to Rayner, even with the success of a £4.5bn capital raising plan in hand, Barclays will still look weak. Relative to its peers, that is.
Capital adequacy is relative, not absolute - In 1991 Barclays described its 5.9% Tier 1 ratio as being “one of the best in the world”, yet 17 years later it has announced a record share issue from a starting Tier 1 ratio of almost 8%. This illustrates one key feature of our view on capital - rather than an absolute number it is the amount relative to peers and the underlying economic and market environment that matters.
The upshot being that Barclays will need another £9bn. In fact, a further £6.6bn would be needed simply for the bank to reach the same capital position as RBS.
Figure 6 compares Barclays’ capital position with that of the European Bank sector since 1996. We have used consistent targets over time and by bank for three capital ratios - Tier 1, leverage and tangible equity to assets - and compared the capital needed to meet these target ratios against the capital held to determine the level of capital “deficit”. This “deficit” is then expressed as a percentage of market capitalisation.
Arresting stuff.
None of which means, of course, that Barc will raise more money. Especially given intransigence from the bank in the face of the current effort - made real, it would seem, only by sustained pressure from the FSA.
Related links
The John and Bob show - FT Alphaville
Barclays - the shine begins to wear off - FT Alphaville
