…On the decision to shun the government’s toxic asset insurance scheme.
Alex Potter, Collins Stewart:
Trading opportunity now seems to have ended
When we last wrote on Barclays (16-Mar) at the time of the confirmation of talks on an iShares sale, we noted it as being oversold with improving trends . Having risen c.100% since then, this opportunity seems closed.
No APS participation at least removes uncertainty
Mgmt indicate that APS help is neither in the interests of shareholders nor customers. Further, it indicates that the bank satisfies the FSA stress-tests even without APS help. This has two effects: firstly, the bank can continue with its plan to pay (not just declare) a dividend in 2009. Secondly, it means the bank will remain outside majority state ownership and without major government control both positives. We wonder if Barclays stmt that the APS is not good for clients is cautioning against government s drive to increase SME and mortgage lending and the question over whether this will not simply get over-indebted UK into even more troublei.
Shares sale going well implicitly confirming price rumours
We estimated a price tag of up to £2bn earlier in the month but the media is carrying price estimates of £3-5bn. We feel that mgmt s affirmation of the process without a correction on price, implicitly confirms the speculation. This would be positive, moving tangible BVps from 230p to 260p, our price target up similarly and equity Tier 1 ratio from 6.7% to c.7.5%.
Jonathan Pierce, Credit Suisse:
That trading remains strong is encouraging. It is probably helped by fair value gains on own debt (5 year CDS at 199bps versus 163bps at December 2008) but suggests that further writedowns on structured assets have been at least offset by strong revenue generation in Barclays Capital. However, the main concern of the market – monoline exposures – remains. Indeed, the decision not to go into APS could be seen negatively as it means the bank could still suffer a sharp hit from the £8.3bn monoline position, which itself might increase if underlying asset values decline. Whether the scheme would actually have protected Barclays against this, we don’t know. We wait for more detail from RBS in this regard but it is feasible that APS covers banks against hedge values as at 1st January but not increases thereafter.
On balance though, Barclays declining APS can’t be a surprise. Management has talked down the scheme for weeks, suggesting it wasn’t overly generous to LBG and RBS. We don’t agree with this, but at least it leaves Barclays to its own destiny and removes the prospect of a big hit to NAV and equity tier 1 courtesy of the APS payment.
However, it means Barclays must now get on and boost its equity tier 1 ratio – reported 6.7% at 2008, or 6.4% ex excess expected loss (although we note the potential for the EEL, calculated at Barclays on a largely TTC basis, to reduce as provisions increase, potentially towards zero in due course, assisting the equity tier 1 ratio). iShares remains the focus here, and at £4bn would yield a 80bps gain on our numbers, but the statement – and FT – suggests to us that we will have to wait a few more days for that.
Simon Pilkington, Cazenove:
Barclays has passed the FSA’s stress test without being required to issue new equity, unlike its two domestic competitors. Unsurprisingly, it has decided not to participate in the APS.
We estimate the disposal of iShares could add 50bp to equity tier 1, and the repurchase of tier 2 debt could increase it further by up to 15bp. Barclays could therefore, we believe, absorb up to £16bn of asset impairment and experience higher RWA growth before breaching the FSA’s guidance for a minimum 4% equity tier 1 ratio.
Barclays reiterated yesterday that the group’s trading performance “continues to be strong”. We expect this applies equally to Bar Cap; if so it is in contrast to recent comments by US banks suggesting trading conditions had deteriorated in the past month.
However, in our view it is the balance sheet rather than near term earnings outlook at Bar Cap that remains the focus for most investors. Even if Bar Cap returned to peak profits this year, we estimate this would have only a small impact on balance sheet metrics: for example, reducing group leverage by two points (to 34x) and adding 13p (5%) to NTAV. We believe the shares can close the discount to NTAV as the probability of capital issuance has decreased.
We retain an INLINE recommendation as our preference in the sector remains for the international banks with lower balance sheet gearing, but in our view Barclays’ operating performance will continue to diverge from that of RBS and Lloyds Banking Group and this is not reflected in the relative valuations.
Mike Trippitt, Oriel Securities, who has a little snipe at the Soc Gen banks team (highlighted)
Barclays has decided not to enter the UK Government’s Asset Protection Scheme.
The bank passed the FSA stress testing, based on early 1990′s style impairments for a two year period.
The only basis on which further capital would be required is if (i) the economic outturn is substantially worse than in the stress testing (ii) credit market exposures are reduced at below current carrying values which according to the trading statement does not appear to be the case.
Certainly suggestions in the market of a further £15-£20bn of capital required seem wide of the mark Barclays refers to trading at the start of this year as strong.
The potential sale of I-shares (discussions ongoing) will add incremental core tier 1 which will not be required to fund the asset protection scheme.
We reiterate our Add recommendation and see yesterday’s price fall on the back of capital concerns as overdone.
Related links:
Barclays to Treasury: Keep yer money – FT Alphaville
Barclays to Treasury – some early reaction – FT Alphaville