45 per cent.
That’s how much shares in Barclays have risen this week.
The market has chosen to ignore the ongoing row about the bank’s tax avoidance activities, on which the Guardian has new claims, and focus instead on trading, which we are told has been strong in the first months of 2009, and the upside from potential asset sales - Barclays confirmed this week talks to sell iShares, its exchange traded funds business.
Unsurprisingly, market pros are now starting to take some chips off the table - in early trading on Friday the shares are down 5.5p at 107p. The flurry of profit taking has also been fuelled by a note from Michael Helsby, the Morgan Stanley analyst who forecast the jumbo rights issue at HSBC.
He reckons the recent trends in investment banking are unsustainable and thinks Barclays will need to raise a further capital even if it manages to sell iShares.
With bad debts in the UK set to rise significantly and £7bn of potential losses sitting in structured credit portfolios, Helsby sees Barclays needing a further £4bn of capital between now and 2011.
If we combine plans in the “Turner Report” to treble the risk weighting of trading assets (~150bp of capital threat to Barclays) with our new more conservative base case earnings and a stress test that models Barclays’ Core Capital ratio falling to 3.6%, then this suggests that capital options need to be addressed in this cycle.
As such he expects Barclays to sell iShares, book a gain of £2.7bn, and then raise £4bn after the reset window on the mandatory convertible notes expires in June.
But he also has some very interesting things to say about Barclays’ exposure to monolines.
We believe there is an important debate surrounding the treatment of Barclays’ monoline credit valuation adjustments (CVAs). Barclays has purchased a total of £27bn of protection from monolines, on a range of assets from CLOs, to CMBS, to RMBS. On this protection, it has benefited from hedge gains of over £10bn. But given that these gains are contingent on the monoline being able to pay up, we think they should be haircut, and it is here where Barclays differs from its peers.
So far, Barclays has taken a charge of just £1.7bn against those hedging gains. Barclays argues that this is because of the joint probability nature of the risk - it faces loss if the asset becomes impaired AND the monoline defaults with low recovery.
But as Mr Helsby notes:
In our view, this differs from the approach of almost all other banks that our credit team tracks. Asset prices are falling, which allowed Barclays to recognise a large hedge gain. However, it appears to be arguing that it can take the hedge gain but not the CVA, as the assets are actually very safe.
Related links:
A slow motion implosion at Barclays - FT Alpaville
Barclays reaches for its lawyers… - FT Alphaville
Note to the board, Barclays Plc - FT Alphaville
