Barclays Plc, Britain’s second-largest bank by assets, won’t get the extra time it was seeking to meet regulators’ demands to boost capital, according to a person with direct knowledge of the situation.
The Prudential Regulation Authority has told the lender it won’t get until the end of 2014 to increase capital to at least 3 percent of assets, said the person, who asked not to be identified because the move hasn’t been made public. The bank, which holds the least capital as a proportion of its assets of Britain’s four biggest banks, is considering selling new stock or contingent convertible bonds to plug the gap, two people with knowledge of the talks said.
To meet the ratio this year, the bank will have to raise either 7 billion pounds ($11 billion) in equity or cut 240 billion pounds of assets, analysts estimate. The bank was one of only two to miss the regulator’s target in June. Nationwide Building Society, the country’s biggest customer-owned lender, was given until the end of 2015 to make up the shortfall.
“We don’t believe Barclays would contemplate raising as much as 7 billion pounds in equity,” said Ian Gordon, a banking analyst at Investec Plc in London who has a buy rating on the shares. The lender may seek to raise as much as 4 billion pounds by selling new stock, and issue CoCos for the rest, he added.
Barclays said in a statement it has held talks with the PRA and will update the market when it reports earnings tomorrow.
Deutsche Bank AG and Credit Suisse Group AG, Barclays’s corporate brokers, are already preparing for a potential share sale, according to another person with knowledge of the talks. The British lender may appoint two more banks to help manage the sale later today, the person added. Barclays’s investment-banking unit is also working on the sale, the person said.
The shares fell as much as 4.1 percent and were down 2.8 percent at 311.05 pence as of 1:43 p.m. in London trading, for a market value of about 40 billion pounds. That’s the biggest intraday drop since July 3. The stock has gained about 19 percent this year.
Officials at Barclays, Deutsche Bank, Credit Suisse and the PRA in London declined to comment.
Barclays CEO Antony Jenkins said last month that bringing forward the deadline would force Barclays to cut lending. The bank favors issuing cheaper CoCos instead of new stock to meet the shortfall, people with knowledge of the matter said on July 27. Barclays is seeking to persuade regulators that CoCos would be sufficient to make it safer, one of the people said. The bank received shareholder approval at its annual meeting on April 25 to sell CoCos, which become shares if its core Tier 1 equity ratio drops below a set level.
Barclays may opt for additional Tier 1 bonds, which are likely to be priced more expensively than CoCos and convert to shareholder funds to absorb losses rather than shares, said Christopher Wheeler, an analyst at Mediobanca SpA in London, with an outperform rating. They could count as core Tier 1 capital in a similar way as shares do under Basel rules, he said.
The Basel committee published a draft leverage ratio in 2010 as part of a general overhaul of its capital standards. The group is working on the details of the measure, which is scheduled to become binding from 2018. It would require banks to hold Tier 1 capital equivalent to 3 percent of their assets, with no scope for these assets to be risk weighted.
Jenkins, 52, said last month the Barclays can meet the requirement quicker than planned “with minor income effects.” The CEO announced in February that the bank will trim 1.7 billion pounds in annual expenses by 2015 and cut costs to about 55 percent of income from 71 percent in the first quarter.
Barclays will say second-quarter pretax profit, excluding swings in the value of its own debt, rose to 2.1 billion pounds from 1.78 billion pounds in the year-earlier period on cost-cuts and increased income from investment banking, according to the median estimate of nine analysts surveyed by Bloomberg.
The lender set aside an additional 1 billion pounds in the fourth quarter to compensate clients wrongly sold interest-rate swaps and loan insurance as it announced a net loss of 1.04 billion pounds for 2012.