Barclays Plc may have to sell new shares to raise money if regulators make it bolster its leverage ratio by the end of the year, according to Mark Phin, an analyst at Keefe, Bruyette & Woods Ltd.
To meet the 3 percent leverage ratio target set by the Bank of England’s Prudential Regulation Authority, Barclays could raise 7.3 billion pounds ($11.1 billion) in equity, or cut 240 billion pounds of assets, wrote Phin in a note to clients today. With a 3 percent ratio, a bank would hold 3 pounds of equity capital for every 100 pounds of assets.
Bank of England deputy governors Paul Tucker and Andrew Bailey said today it’s right for the 3 percent leverage ratio to be imposed immediately, five years earlier than the initial deadline agreed by global regulators. Barclays Chief Executive Officer Antony Jenkins said last week that the London-based bank may cut lending if the PRA, headed by Bailey, forces the lender to speed up plans to meet the goal.
“The PRA has, unhelpfully, not defined when banks need to adhere to a 3 percent ratio, albeit we know that plans had to be submitted by end-June with agreement by end-July,” wrote Phin, who has an outperform rating on the stock. Barclays’s plans for 7 percent core equity Tier-1 capital ratio, a measure of financial strength, “do not include equity recourse, but the introduction of a leverage requirement means it cannot be ruled out,” wrote Phin in London.
Officials at Barclays, Britain’s second-biggest bank by assets, declined to comment. Raising 7.3 billion pounds would dilute net asset value a share by 5 percent and earnings per share by 14 percent based on 2015 estimates, wrote Phin.
The shares were down 0.9 percent to 282 pence at 4:19 p.m. in London, bringing its gain this year to 7.5 percent.
It’s unlikely the bank would issue shares to cover the entire shortfall, and could opt to sell more-liquid assets or issue bonds that convert into equity when capital falls below a preset level, known as contingent capital, he said.
Global regulators included a provisional version of the leverage limit in an overhaul of banking rules following the 2008 financial crisis. The rule differs from other capital requirements set by the Basel Committee on Banking Supervision because it gives lenders no scope to take into account the riskiness of their investments when working out the reserves they need.
While the leverage ratio won’t be binding until 2018, lenders would be obliged to start publishing how well they measure up to it by the start of 2015, the Basel group said last month.
-- With assistance from Scott Hamilton and Ben Moshinsky in London. Editors: Jon Menon, Simone Meier