Around £17bn of it, according to Jonathan Pierce, banking analyst at Credit Suisse
The reason, as you might have guessed, are the latest proposals on capital requirements from the Basel Committee on Banking Supervision, which have been covered about extensively on this site.
Under the new proposals, which could yet change, Pierce estimates Barclays’ equity Tier 1 ratio would fall from 9.6 per cent to 5 per cent.
This is partly because Barclays will be forced to deduct the value of its stake in money manager Blackrock, minorities holdings and deferred tax assets (DTAs).
But it is also because Barclays is facing a large increase — Pierce estimates £150bn — in risk-weighted assets (RWAs) under the new Basel III accord.
And this is the real cause for concern:
Changes to market risk rules are well understood, but securitisation rules and in particular counterparty credit risk perhaps less so. We don’t have an exact answer yet on CCR – but we conclude that it poses material risk;
Taking all of these adjustments together, and assuming no management action to alleviate the impact and no changes in the proposals as they stand, we believe Barclays RWA could increase by between £135-165bn in the new regime.
This would drive Barclays equity tier 1 ratio down to 5.0% at December 2009E, on our estimates. For a bank where we expect over 60% of the RWA on new proposals to come from Barclays Capital, this is suggestive of a capital deficit, pre- any offsetting management action (see later) in our view.
Here are his workings:
Now, assuming Barclays wants to maintain an equity Tier 1 ratio of at least 8 per cent in the new regime — and remember systemically important banks with large investment banking operation could be forced to maintain ratios in the high single digits — then Pierce estimates Barclays will need to find £17bn.
However, this should be “reasonably” manageable, he says
Pierce reckons the bank could generate around £20bn of equity tier one capital over the next three years by selling its 50 per cent stake in Blackrock, buying in minorities in Absa, its South African bank, and the restructuring of securitisation exposures.
But, he says the key question, for Barclays and Barclays Capital is whether it can control its RWAs over this period.
If it can’t, then an equity raise a distinct possibility.
Emphasis ours:
In theory therefore, it is possible that Barclays can manage the transition to the new Basel rules without an external capital raise. But we believe this would require a substantial tightening up of the business over the next three years, the potential disposal of BlackRock shares, and the freezing or even removal of the recently reinstated dividend.
In practice, restraining the bank to such an extent might not – understandably – be the preferred choice of management. We don’t expect any firm decision from Barclays until the Basel rules are better understood, but we think a capital raise at some point in the future cannot be ruled out. And with a balance sheet of this size, every 1% CAGR in RWA over the next three years would require equity capital support of almost £1.5bn on our numbers (assuming an 8% equity tier 1 ratio).
Shares in Barclays are lower on Tuesday morning:
Related link:
All hail the Basel banking regime change – FT Alphaville
Digesting the Basel reforms – FT Alphaville
BarCap calculates the cost of ‘Too Big Too Fail’ – FT Alphaville