INVESTORS and analysts hit out at regulators yesterday, accusing the Bank of England of making arbitrary and unreasonable demands on banks.
Barclays had pleased investors in February with a plan to cut its least efficient units and get back on a sustainable footing with return on equity (RoE) above its cost of capital in 2015.
But instead investors face being diluted by a £5.8bn round of capital raising, £2bn to be raised through contingent convertible bonds (cocos), while more parts of its lucrative investment bank will be trimmed back.
These measures have pushed back its RoE plan by a year and forced Barclays to undertake another gruelling review of its 75 business units to see which ones match the new rules on capital.
On top of that the latest revisions to capital criteria mean the cocos issued earlier this year and at the end of 2012 do not count towards the leverage ratio as initially hoped.
Those cocos see investors wiped out if the bank’s core tier one capital ratio falls below seven per cent. The new loss absorbing instruments will instead convert to equity when that trigger is reached.
Analysts fear the watchdog’s demands will harm the whole sector, as it shows the regulator changing banks’ requirements at will.
“Since the start of the credit crisis we have stressed time and again our concerns about the impact of regulatory intervention, and this shows how quickly the goalposts can move on these issues,” said Nic Clarke from Charles Stanley.
“In their defence, Barclays’ management do highlight that given the new regulatory landscape it has acted ‘swiftly and boldly’ to meet this new target.”
And shareholders hit out at the uncertainty surrounding banks’ capital positions.
David Cummings from Standard Life Investments said in a note to Reuters that the change in rules “appears both capricious and hostile to banks and is in consequence raising the cost of capital for the banking sector, notably through a lack of stability or consistency in its policy on capital”.
The Bank of England’s Prudential Regulation Authority (PRA) said the bank is now well positioned to hit the authorities’ targets.
“Following constructive discussions, the PRA has agreed and welcomes Barclays capital plan,” it said in a statement.
“We have considered all elements of the plan, including new capital issuance, planned dividends and management actions to be taken and, based on Barclays’ projections, conclude that it is a credible plan to meet a leverage ratio of three per cent after adjustments, by June 2014 without cutting back on lending to the real economy.”
Meanwhile Barclays reported a fall in profits for the first half of the year.
Pre-tax profits fell 17 per cent to £3.6bn, with costs to achieve its Transform programme coming in at £640m and additional misselling provisions at £2bn.
Those costs also dragged down return on average shareholders’ equity to 7.8 per cent, from 10.6 per cent in 2012.
Barclays’ UK retail and business bank made a profit of £333m in the second quarter, down from £360m in the same period of 2012. And the investment bank made a profit of £1.07bn, almost unchanged from £1.06bn a year ago.
ADVISERS SHARE £100M FEE HAUL AS JP MORGAN LOSES OUT
Barclays’ £5.8bn rights issue is set to provide a huge boost to the investment banks chosen to run the book, with a fee pot of nearly £100m available for those involved.
But the issue this time around is so big it has enlisted Bank of America Merrill Lynch and Citibank.
Part of the need for another two banks is the risk they are taking on board – the issue is fully underwritten, meaning any unsold shares will be bought by the investment banks, leaving them exposed to some risk.
However the bankers involved insist it is a very sound offering, selling shares in a popular and strong bank at a 35 per cent discount which should have no trouble getting off the ground.
Another reason for splitting the offer is to find as broad as possible a market for the stock.
Although the shares are initially offered to existing investors, the sheer volume – more than one quarter of the bank’s existing market capitalisation – means more investors will need to be found to pay up.
Deutsche Bank’s Nick Bowers is corporate broker on the Barclays account, so has worked on setting up the deal, and is joined by Tadhg Flood, co-head of global FIG, Neil Kell, head of FIG equity capital markets in Europe, the Middle East and Africa (EMEA) and Ed Sankey, global head of equity syndicate.
Credit Suisse’s team on the deal includes UK chief executive James Leigh-Pemberton and European investment banking co-head Ewan Stevenson.
Bank of America Merrill Lynch has Arif Vohra, managing director in EMEA financial institutions investment banking, on the deal, alongside Craig Coben, the bank’s head of EMEA equity capital markets.
And senior managers Gilles Graham and Michael Lavelle head up Citi’s deal team of more than a dozen bankers. Fees on the deal include 1.7 per cent of gross underwritten proceeds for the initial underwriters, while Credit Suisse and Deutsche Bank will receive £446,344 as a broking fee.