Barclays reveals £12.8 billion balance sheet hole

People walk past a Barclays logo at the bank's headquarters in Canary Wharf in east London, on July 3, 2012.

Story highlights

  • Barclays Chief Executive Officer Antony Jenkins described the plan as "bold and decisive"
  • Barclays also announced second-quarter profits of £3.6bn on an adjusted pre-tax basis, down 17 per cent.
  • Alongside the capital measures, the bank announced £2bn of fresh mis-selling provisions

Barclays has revealed a £12.8 billion ($19.6 billion) hole in its balance sheet as it announced a £5.8 billion rights issue, buttressed by a plan to shrink its balance sheet and issue £2 billion of contingent convertible debt.

The bank's shares, which fell 4 per cent on Monday after the Financial Times reported news of the rights issue, fell a further 5.5 per cent to 291.8p in early trading in London.

The bank blamed a recalculation of the Prudential Regulation Authority's leverage ratio under new European definitions of capital.

It said it had a 2.2 per cent leverage ratio under that measure, when factoring in expected losses and other charges, as at the end of June. That compared with a 2.5 per cent number reported by the PRA last month on the basis of older figures.

The rights issue will be priced at 185p per share, equivalent to a 35 per cent discount to the theoretical ex-rights price. The offering is underwritten by Credit Suisse, Deutsche Bank, Bank of America Merrill Lynch and Citigroup.

In addition, the balance sheet would be shrunk by between £65 billion and £80 billion, Barclays said, bringing it down to £1.5 trillion. Retained earnings would make up the balance of the capital gap.

Antony Jenkins, chief executive, described the plan as "bold and decisive" and said a target to distribute 40-50 per cent of earnings in dividends would be accelerated by a year to 2014. However, the aim of exceeding the bank's cost of capital, which Mr Jenkins has said is about 11.5 per cent, was pushed back to 2016.

    Alongside the capital measures, the bank announced £2 billion of fresh mis-selling provisions, £1.35 billion to cover PPI and £650 million to cover interest rate swaps.

    Barclays also announced second-quarter profits of £3.6bn on an adjusted pre-tax basis, down 17 per cent. Statutory pre-tax profit doubled to £1.7 billion, the bank said.

    - Capital raise is in line and discount for rights is as expected so will eliminate capital shortfall.

    - BARC is offsetting this by saying they will increase dividend payout earlier to 40-50%, but having to push out ROE being above COE until 2016 now.

    - BARC should therefore trade at discount to their new TBV of 306p (post rights) or 336p (pre rights).

    - This is not helped by 1H profits being weaker than expected with the increase in provisions being a concern.

    - So overall expect BARC to be c.5% weaker today partly on capital raise and pushed backed ROE targets.

    - Weaker than expected earnings likely to push consensus down 2-3%.