Unsurprising, perhaps. Barclays might have passed the FSA’s stress test, but not everyone is prepared to give the bank a clean bill of health.
Take the banks team at Société Générale, who on Monday slapped an aggressive “sell” rating on the stock, along with a 46p target price.
Asheefa Sarangi and colleagues reckon Barclays will need to raise a further £15-£20bn of tangible common equity to adequately address its excess leverage and strengthen its relatively weak core Tier 1 capital ratio.
Our calculation that Barclays is £15-20bn short of TCE is based on 1) comparing the bank’s leverage position and core Tier I capital levels against peers 2) our interpretation of the changes that will be required on the back of the Turner Review and 3) stress-testing the bank’s core Tier I capital under a worst case scenario. On our numbers, £15-20bn of ordinary equity would reduce Barclays’ total adjusted assets/core Tier I capital ratio to 21-24x and total adjusted assets/tangible common equity ratio to 20-23x. This would bring the bank’s ratios into line with its peers and, we believe, into compliance with the leverage-lite world that we expect will exist in the UK. It would also allow the bank to remain regulatory solvent through 2011e under our “stress case” scenario.
Here are SocGen’s peer comparisons (click for larger image):
Soc Gen reckons Barclays has four options to address the issue, which it helpfully puts into graphical form
If that is not quite clear, the options are: 1) undertake asset disposals, 2) raise private capital 3) go cap-in-hand to the government and, 4) do nothing.
Soc Gen reckons Barclays will end up being forced to take take option 3.
However given the material size of the capital deficit and developments over the past year, we believe the UK government is likely to be the main provider of the requisite funds. The UK government could end up with a 60-67% stake in Barclays. This would trigger a material restructuring of the bank’s business model and balance sheet, particularly in relation to Barclays Capital.
Whether you agree with that analysis or not, the wider point here is that concerns about Barclays’ capital position are not going to disappear just because it has passed the stress test. Barclays remains one of the most highly leveraged banks in the western world.
Related Links:
Barclays passes FSA stress test – statement