Concerns about a multi-billion pound share issue and more provisions for mis-selling weighed heavily on Barclays today.
Its shares were down 4% on the FTSE 100 Index amid speculation the banking giant is mulling a dilutive £4bn (€4.6bn) rights issue to satisfy regulators’ concerns about its financial strength.
The bank’s advisers reportedly sounded out investors about a potential rights issue last week as it looks for ways of meeting tough new demands from the Bank of England over capital levels.
Barclays is expected to raise fresh funds by issuing shares or selling bonds which convert into equity, and said it will reveal plans to appease regulators alongside its first-half results tomorrow. The bank added it noted speculation about a share issue and has been talking to regulators.
Banking analyst Ian Gordon of Investec Securities said a multi-billion pound share issue would be disappointing and unnecessary.
The lender is also expected to report bigger-than-expected provisions to account for previous mis-selling of interest rate swaps, payment protection insurance (PPI) and identity fraud protection.
The bank has already set aside £2.6bn (€3bn) to cover the PPI scandal, which saw thousands of its borrowers sold loan re-payment cover they did not need or could not claim on. The bank has also set aside £850m (€984m) to repay small businesses sold complex interest rate swaps.
It could also reveal compensation for Barclaycard customers sold identity fraud and credit card cover on behalf of embattled card insurer CPP.
Barclays and Lloyds were the most heavily-traded shares on the FTSE 100 today, as banking stocks were hit by a wave of selling.
The Sunday Times said Barclays is considering a £4bn (€4.6bn) rights issue – which would equate to 10% of its market value.
Barclays is struggling to meet a new rule imposed by the Bank’s Prudential Regulation Authority (PRA), which forces it to hold more assets as a buffer against future financial crises.
The PRA recently ordered Britain’s five biggest lenders to raise another £13.4bn (€15.5bn) to plug a higher-than-expected £27.1bn (€31.3bn) hole in their finances - including ordering Barclays to raise £1.7bn (€1.96bn).
The PRA also imposed a new rule, called the leverage ratio, demanding big banks must hold capital worth 3% of their loans.
Barclays was told it has a leverage ratio of 2.5% – prompting speculation the Bank has rushed forward the deadline for meeting this rule from a previous deadline of near the end of this decade.
Britain’s biggest building society Nationwide was also singled out by the PRA and told to raise fresh funds. It has been given until the end of 2015 to do so, and insists it does not need to tap investors for extra funds.
Mr Gordon said: “If Barclays has the courage to say no (to an equity issue), we would see further upside, but sadly, this appears less likely.
“We don’t believe Barclays would contemplate raising as much as £7bn (€8.1bn) equity. A smaller sum, perhaps £2-4bn (€2.3-4.6bn), seems plausible, even if unnecessary.”
He expects the bank to set aside another £200m (€231m) for PPI and £400m (€436m) for interest rate swaps.
Barclays chief executive Antony Jenkins has criticised the leverage ratio as “crude” and said it would hit the target by 2015, adding any move to speed up this process could force it to squeeze lending. The PRA has rejected anything that restricts lending – preventing Barclays from shrinking its loan book to meet the target.
Analysts on average expect Barclays’ interim profits to surge to £3.69bn (€4.27bn), excluding restructuring costs, from £871m (€1bn) a year earlier.