(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By George Hay
LONDON, June 20 (Reuters Breakingviews) - Britain’s new lead regulator has just given Barclays’ (BARC.L) investors 6 billion pounds' worth of fresh uncertainty. The declaration by the Prudential Regulation Authority that the UK bank needs to find 3 billion pounds of capital to achieve a satisfactory core capital ratio this year isn’t the problem. The issue is Barclays’ overall leverage.
Barclays should make 4.5 billion pounds of post-tax profit in 2013. Retaining some of these earnings means the bank should have sufficient resources to achieve the minimum 7 percent core capital ratio – equity as a proportion of risk-weighted assets – after the regulator’s stress test. Contingent capital issuance can make up any gaps.
But it’s harder to see how Barclays deals with its lowly 2.5 percent leverage ratio, which measures equity as a proportion of total assets. Apart from Nationwide, all Barclays’ peers have already attained the regulatory minimum of 3 percent.
It’s another headache for investors, who were already wondering whether Barclays will have to raise more capital to placate U.S. regulators. The PRA has yet to say when Barclays and Nationwide have to close the gap, but it has asked them both to explain how they plan to do so by the end of the month.
The Doomsday scenario is that the PRA forces them to attain a 3 percent leverage ratio by the end of 2013. If so, Barclays would either have to raise around 6 billion pounds in fresh equity – 16 percent of Barclays’ market capitalisation – according to Reuters Breakingviews’ calculations based on PRA disclosures. Alternatively, the bank would have to shrink its assets by over 200 billion pounds.
It’s almost certain that incoming Bank of England Governor Mark Carney will cut Barclays some slack – perhaps until 2015, in line with the bank’s own capital plan. He won’t want to do anything to curb lending. But Barclays investors could have done without the added uncertainty.
- The Prudential Regulation Authority said on June 20 that UK lender Barclays was short of 3 billion pounds to attain a 7 percent core Tier 1 ratio under stressed conditions by the end of 2013.
- The regulator also said that after reaching the minimum core capital ratio, Barclays’ core equity would be only 2.5 percent of its total assets, against a 3 percent requirement. Nationwide was the only other UK bank to have a leverage ratio of less than 3 percent.
- Barclays and Nationwide will have to report to the PRA by the end of June to explain how they will meet the 3 percent leverage ratio target. The PRA will inform them in July how long they have to hit their objective.
- Barclays shares fell 4.7 percent to 287 pence. European banks in general fell 4 percent.
- Reuters: RBS, Lloyds, Barclays account for most of UK capital gap -FT [ID:nL5N0EV3YN]
- For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Chris Hughes and Sarah Bailey)
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