Barclays Plc, the U.K.’s second-largest bank by assets, plans to raise 5.8 billion pounds ($8.9 billion) in a rights offering to bolster capital as it booked its biggest charge to date for customer compensation.
Investors will be able to buy one new share for every four they already own for 185 pence, 40 percent less than yesterday’s closing price, London-based Barclays said in a statement today. It will also shrink assets by as much as 80 billion pounds to 1.5 trillion pounds and sell 2 billion pounds of loss-absorbing securities to meet calls by the regulator to cut leverage.
Chief Executive Officer Antony Jenkins, 52, is selling more shares than the 4 billion pounds analysts had anticipated after the lender’s capital shortfall swelled to 12.8 billion pounds at the end of June under the stricter Basel III rules on bank capital. The Prudential Regulation Authority is imposing a 3 percent leverage ratio, forcing banks to hold 3 pounds of equity for every 100 pounds of assets to make the financial system safer. Barclays had sought to plug the deficit by using contingent convertible bonds and retaining earnings.
“If you’re doing a rights issue, then you have to clear the decks and present investors with a clear balance sheet,” said Mike Trippitt, a London-based analyst at Numis Securities Ltd. who downgraded Barclays to sell this month in anticipation of a rights offering. “You can’t do a rights issue and then follow it up with additional provisioning in the next quarter. My only concern is that they haven’t done enough.”
Barclays said it’s contesting a regulator’s findings in a probe into whether the bank properly disclosed fees paid to Qatar during its 7 billion-pound fundraising in 2008, a deal that helped it avoid a bailout.
The U.K.’s Financial Conduct Authority provided preliminary findings to Barclays in respect of some of these commercial agreements and the involvement of four current and former employees, the bank said. The FCA’s enforcement unit typically gives companies early notification when it plans to levy fines or other penalties.
The shares tumbled 5.7 percent to 291.3 pence in London trading, the biggest decline for a year. The stock is up 11 percent this year, making it the third-best performer of Britain’s five largest banks after Lloyds Banking Group Plc and HSBC Holdings Plc.
The lender will set aside 2 billion pounds to cover the cost of redress. It will allocate 1.35 billion pounds for clients sold insurance on loan repayments they didn’t need and a further 650 million pounds for customers offered interest-rate swaps that lost them money. In total, the bank, run by Robert Diamond until last year, has set aside 5.4 billion pounds for compensation, second only to Lloyds’s 7.2 billion pounds.
Britain’s biggest banks have set aside more than 15 billion pounds for payment-protection insurance redress. Lloyds and Royal Bank of Scotland Group Plc, which report earnings later this week, may have to make additional provisions after Barclays, said Andrew Coombs, a banks analyst at Citigroup Inc.
Barclays’s pretax profit, excluding gains and losses on the bank’s own debt and compensation charges, fell to 3.59 billion pounds from 4.34 billion pounds in the year-earlier period, missing the 3.7 billion-pound estimate of 22 analysts surveyed by the company. For the second quarter, profit on the same basis fell to 1.81 billion pounds from 1.94 billion pounds, short of the 2.11 billion-pound median estimate of seven analysts surveyed by Bloomberg.
First-half profit was reduced by 640 million pounds of restructuring costs linked to Jenkins’s overhaul of the lender to make it more profitable. He is seeking to cut 1.7 billion pounds in annual expenses by 2015, eliminate 3,700 jobs and reduce costs to about 55 percent of income from 71 percent in the first quarter.
The costs of redress pushed the consumer banking unit, which Jenkins formerly ran, into a loss and reduced profit at the Barclaycard credit-card operation. The retail and business bank posted a 28 million-pound loss compared with a 292 million-pound profit in the year-earlier period. Barclaycard’s profit fell 89 percent to 85 million pounds, hurt also by rising impairments.
Profit at the investment-banking unit rose to 2.39 billion pounds from 2.24 billion pounds, missing analysts’ estimate of 2.48 billion pounds. Income from trading fixed income, commodities and currencies fell 13 percent to 3.57 billion pounds. Equities revenue rose 27 percent to 1.53 billion pounds.
Net income rose to 671 million pounds in the first six months from 148 million pounds in the year-earlier period because the costs of compensating clients were mitigated by a gain revaluing the bank’s own debt.
Barclays was one of only two British lenders to miss the regulator’s leverage target in June, with only 2.5 percent. Nationwide Building Society, which at 2 percent also failed, was given until the end of 2015 to make up the shortfall.
Barclays said that under the full Basel III rules its ratio was only 2.2 percent at the end of June. The ratio declined after the latest version of the Basel rules added 85 billion pounds of leverage exposure, the lender said. Part of the 12.8 billion-pound gap comes from a PRA calculation of future bad loan losses and potential redress for customers, which reduces capital by 4.1 billion pounds, Barclays said.
Balance sheets are also typically bigger in the middle of the year than at the end of the year, indicating there will be extra assets to hold capital against because of the PRA deadline, Finance Director Chris Lucas told analysts today.
In February, Jenkins presented his plans as leader of the bank to investors, pledging to cut costs, close businesses that hurt the bank’s reputation or weren’t profitable, mend relations with regulators and pay more of its profits to shareholders. He said at the time he was “comfortable” with how regulators viewed the bank’s capital plans.
That comfort has waned, said Chirantan Barua, an analyst at Bernstein Research with an outperform rating on Barclays.
“What has been quite bizarre is the turnaround from February when we were led to believe that the strategy and targets were vetted by the regulator,” said Barua, who’s based in London. “Especially around stuff like PPI and swaps mis-selling which are legacy problems.”
The lender will sell new stock, 2 billion pounds of Tier 1 securities, reduce leverage exposure by 65 billion pounds to 80 billion pounds to about 1.5 trillion pounds and retain earnings to meet the target. The plan will boost the lender’s leverage ratio to more than 3 percent by June 2014 and increase core Tier 1 capital ratio to 10.5 percent under the Basel III rules by 2015 from 9.3 percent at June 2013.
The measures won’t have “any impact on revenue or lending the way we’ve constructed them,” Jenkins said in an interview with Bloomberg Television’s Francine Lacqua in London. “We’ve taken bold and decisive action to reduce uncertainty around Barclays.”
Credit Suisse Group AG, Deutsche Bank AG, Bank of America Corp. and Citigroup Inc. are underwriting the stock sale, the biggest since Lloyds’s 13.5 billion-pound offer in 2009. The offer is slated to start in September, according to a statement sent by Bank of America. Barclays will pay about 99 million pounds in fees to the banks arranging the stock offering.
“It’s a credible plan to meet a leverage ratio of 3 percent, after adjustments, by June 2014 without cutting back on lending to the real economy,” the PRA said in a statement.
Jenkins also pushed back his target to make the lender’s return on equity, a profitability measure, exceed its cost of equity, to 2016, rather than 2015. Barclays will pay as much as 50 percent of its earnings in dividends from 2014, an increase from its 30 percent target in February.