Barclays must raise €14bn amid capital shortfall

British bank Barclays has to raise £12.8bn (€14.72bn) following a review by the UK Prudential Regulation Authority, which exposed a capital shortfall.

Barclays announced that it intends to raise £5.8bn through a rights issue, which will see one new share issued for every four existing ordinary shares.

The issue price will be £1.85, which is a 40% discount on the bank’s closing price at the end of trading on Monday.

All banks are faced with raising capital to meet new regulatory standards known as Basel III. As part of this new regime, banks will need a minimum 3% leverage ratio, which is the percentage of common equity against total risk-weighted assets.

Following the PRA review it emerged that Barclays had a leverage ratio of 2.2%, with the shortfall amounting to £12.8bn.

“The main driver of the Barclays capital raise emanates from pressure on the leverage ratio target. Based on our estimates, we forecast that Bank of Ireland has a circa 4.0-4.5% leverage ratio in 2013 (range due to including and excluding the life company).

“We estimate a 5% ratio at AIB and 7.5% should the preference shares convert (bearing in mind deferred tax assets of €3.9bn account for 3.2 points of this capital).

“Based on our estimates, the Irish banks satisfy the leverage ratio requirement although their current fully loaded Basel III ratios lag peers but would still be above regulatory requirements,” said Goodbody analyst Eamon Hughes in a research note.

Barclays came through the financial crisis relatively unscathed compared with its peers. However, it has been embroiled in a series of controversies over the past couple of years, including the Libor [London interbank offered rate] rigging scandal, which forced the resignations of its chairman and chief executive in 2012.

Pre-tax profit, excluding exceptional items, for the first six months of the year was down 17% to £3.59bn. Profit after tax and including exceptional items increased by £806m to £1.67bn.

Risk weighted assets were stable at £387bn. Core Tier 1 ratio increased to 11.1% (2012: 10.8%) principally reflecting capital generated through earnings and the exercise of warrants offset by dividends paid.

Total assets increased to £1,533bn (2012: £1,488bn) and total liabilities increased to £1,473bn (2012: £1,428bn) primarily due to higher than expected deposit inflows, resulting in a decrease in the loan: deposit ratio from 110% to 102%