Barclays, which publishes results tomorrow, is expected to set out plans either to sell bonds that are wiped out if it hits trouble or to raise equity to meet the UK rules.
Barclays’ advisers have, reportedly, sounded out investors about a possible £4bn (€4.63bn) rights issue. Sources said last week that was an option, but not the preferred one. CEO Antony Jenkins is still in talks with regulators about how to hit the target, so plans could change at short notice.
The bank needs about £7bn to lift its leverage ratio to a 3% minimum demanded by the Bank of England from an estimated 2.5%, which includes future losses from mis-selling and bad loans.
Regulators are focused on banks’ leverage ratios — that measure a bank’s assets against its equity — to keep risk-taking in check to avoid future taxpayer-funded bailouts. Barclays has already said it plans to issue more capital that could convert into shares or be wiped out if its capital ratios fall below a certain level.
The bank has to make sure any bonds it sells would help its leverage ratio under the UK rules. To do this, the bonds would have to count towards tier 1 capital, the key measure of a bank’s financial strength. Similar bonds Barclays has sold, known as CoCos, have been classed as tier 2 capital.
Much will depend on how much time the bank is given. The regulator is expected to give the bank until the end of 2014, but a tighter deadline could force the bank to raise equity.
Lloyds is forecast to report a doubling of its first-half profit, when it reports on Thursday, illustrating the turnaround at the bank since its £20.5bn bailout by the British government in the 2008 financial crisis.
Banking industry sources had said the results could provide a window of opportunity for UK Financial Investments, which manages the government’s 39% stake in Lloyds, to initiate an immediate first sale of up to a quarter of the shares, valued at around £5bn.
But sources with knowledge of government thinking said a first sale, comprising a placing to institutions such as pension funds and insurers, was more likely to take place in September or October with a sale this week seen as a “long shot”.
The August holidayseason is traditionally a quiet period for share placings and if a sale does not happen immediately after or alongside the results, the UK government would, most likely, have to wait until September at the earliest.
Barclays and other UK banks are also expected to set aside hundreds of millions more for misselling of financial products, including payment protection insurance, an industry source said.
British banks have already set aside more than £14bn for payment protection insurance compensation, but they did not add to that in the first quarter, suggesting payouts had peaked. Barclays has set aside £2.6bn for payment protection insurance costs and £850m for interest rate hedging compensation, and both of those could rise.
Lloyds has set aside £6.8bn for payment protection insurance, far more than rivals, and could this week set aside another £250m, Investec analyst Ian Gordon estimated.
Barclays could set aside £600m-£800m more for payment protection insurance, the Sunday Telegraph reported.
Barclays is expected to make a profit of about £3.7bn for the first six months of the year, up from £759m a year ago, while Lloyds will report an underlying pre-tax profit of about £2.2bn; up from £1.1bn the year before, according to a Reuters poll.