Barclays today announced a fancy new capital plan that illustrates the subtle cultural differences between US and UK banking. When U.S. regulators want banks to raise more capital, they tell them to do it by 2018, and the banks spend the intervening five years whiningabout it. When UK regulators want Barclays to raise more capital, they tell them to do it by June 2014, and Barclays goes out and announces a rights offering pronto. A rights offering! That preferred European way of raising capital has a pleasing symbolism; it's like, okay you equity holders, you let your management get into this mess, and you're responsible for fixing it, so cough up some more cash or there'll be consequences. Bail yourselves out.
The mess, in this case, is that newish leverage-ratio rules require European banks to have assets (measured under IFRS, plus some off-balance-sheet stuff) equal to no more than 33.3 times their capital, and Barclays is at a somewhat astounding-sounding 45.9x,1 so it either needs to chuck around a third of its assets or raise about a third again of its capital or some combination thereof.
They elected combination thereof, to wit:
- The £5.8bn rights offering.2
- Raise £2bn of high-trigger contingent convertibles that will count as capital.3
- "Reduce CRD IV leverage exposure by £65-80 billion to approximately £1.5 trillion (equal to approximately £2-2.5 billion of capital) through low execution risk management actions which have already been identified by the Board."
- "Retention of earnings and other forms of capital accretion," which is a nice way of saying "try to make some money over the next year." £5.8bn rights offering + £2bn cocos + £2.5bn capital-equivalent of "risk management actions" = £10.3bn, leaving what appears to be a plug of £2.5bn of actual moneymaking.
Here's what they have to say about the risk management:
So it's always a little weird when banks say "we plan to get rid of £80bn of assets with no effect on revenues."4 Like: why did you have those £80bn in assets in the first place? If they weren't making money for you I mean? Were they just for decoration?
That table gives you some sense: not sure exactly what's going on on the derivatives stuff, but those not-especially-money-making "securities financing transactions" are presumably pretty low-risk repo plumbing, and the not-especially-money-making "liquidity pool assets" are ... well, they're on page 56 here, basically £138bn of cash (half of it) and government-ish bonds "intended to offset stress outflows" and comply with regulatory liquidity rules. That £138bn is down from £150bn a year ago and seems set to go down by another £15-20bn in the next year.
Because: Barclays needs to reduce its ratio of assets to equity, by a lot. And it only has so much desire to raise equity. And getting rid of risky/rewarding assets would cost it money. But it's not really making any money on its cash rainy-day fund. So it might as well reduce its rainy-day fund. And cut back on the other low-risk low-margin activities. For safety!
Barclays PLC Announces Leverage Plan [Barclays]
1.Depending on your capacity for astonishment. Do you like tables of numbers? Here is one.
2.Is there anything fun about that? It's at "a discount of approximately 40.1% to the closing price ... and a discount of approximately 34.9% to the theoretical ex-rights price based on the Closing Price," which are baaaaaaaasically arbitrary numbers. There is this though:
Mark Holman, chief executive of fixed-income boutique TwentyFour Asset Management, said: “Despite the fact that Barclays’ share price is down a little this morning, you are still getting considerable upside. On a ‘rights-issue-adjusted’ basis, Barclays’ shares are actually trading up.”
True! I see it up 2.5%. I don't necessarily advise you to live your life on a rights-issue-adjusted basis, really, but there's a case to be made that if you own BARC shares you haven't lost money today.
3.Cocos have some of the self-bailing-in pleasingness of rights offerings, with the advantage that they do the bailing-in in times of crisis rather than, like, now. They have the disadvantage that no one believes in them since they'll probably eventually end up in the hands of widows and orphans who'll be all "wait I have to bail out Barclays?" etc. In any case this is a fine passage of prose, on a day full of fine prose:
Barclays announced in late 2012 its intention to issue 2% of risk weighted assets in contingent capital to meet its end state CRD IV capital structure, comprising 0.5% of Tier 2 and 1.5% of AT1. The PRA has confirmed that CRD IV-compliant AT1 with a 7% Fully Loaded CET1 trigger will satisfy both the PRA’s capital and leverage ratio requirements. Barclays therefore expects to raise up to £2 billion of such AT1 securities by June 2014, in accordance with its existing capital plan. The 7% trigger for Barclays’ existing contingent capital securities will, in accordance with their terms, continue to be calculated on a basis that takes into account the PRA’s interpretation of the transitional provisions under CRD IV. Barclays reported today an estimated Transitional CRD IV CET1 ratio of 10.0% as at 30 June 2013; adjusted for the Rights Issue this is equivalent to 11.3%.
4.When it's like "we are getting rid of £80bn in risk-weighted assets with no effect on anything" then you can blame model tweaking but they're just talking about actual (er, IFRS) assets here.