Huge Rights Issue Proposal And Poor Q2 Results Sinks Barclays’ Shares

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If there is one thing clear from the series of announcements made by Barclays (NYSE:BCS) on July 30, it is that the U.K.-based banking giant has quite a distance to cover before it can claim that its business model has returned to normalcy. Plagued by a series of legal issues since the economic downturn of 2008, the many missteps it took over the years continue to hurt the bank’s present day performance, as is evident from the fact that the bank had to set aside a whopping £2 billion ($3 billion) as provisions for its PPI and interest-rate product redressals this quarter. ((Barclays PLC 2013 Interim Results Statement, Barclays Press Releases, Jul 30 2013)) The continuing slowdown in Europe isn’t helping the bank either, as credit impairment charges rose to £925 million ($1.4 billion) – well above the £706 million ($1.1 billion) figure for the previous quarter.

To add to this, Barclays had to give in to the demand to strengthen its capital structure by regulators, and go ahead with the issue of rights to raise £5.8 billion ($8.9 billion) in fresh capital over the coming months. [1] The equity issue plan coupled with a worse-than-expected performance for the quarter resulted in the bank’s share price falling almost 7% over trading on Tuesday.

It must be mentioned here that the legacy issues aside, Barclays’ quarterly results show some notable operating improvements, especially on the cost front – a likely result of changes implemented as a part of the strategic Transform plan. But the extremely dilutive nature of the rights issue combined with the continuing need for additional provisions prompted us to revise our price estimate for Barclays’ stock downwards from $22 to $18.

See our full analysis for Barclays’ stock

Consumer Banking Business Continues To Suffer From Redressal-Related Provisions

Barclays’ performance figures for the first quarter of the year painted a pretty picture for the bank’s operations as it was the first quarter since Q1 2011, when Barclays did not incur a single regulatory or impairment charge. The income statement featured no provisions for PPI redressals, no provisions for interest-rate products redressals and no goodwill impairment – all of which have plagued the bank each quarter for years now.

But that changed this quarter when the bank set aside a figure more than any quarter in the past for both PPI redressals (£1.35 billion) and interest-rate products redressals (£650 million). To get a better idea of how much these two issues have hurt Barclays performance over the last two years, it would help to know that the bank has set aside a total of £3.95 billion ($6 billion) as provisions for PPI redressals and a total of £1.5 billion ($2.3 billion) as provisions for interest rate redressals. This has led to a steady increase in non-interest expenses for Barclays’ consumer banking business over the years, as seen in the chart below.

Equities Trading Desk Continues To Impress

Barclays’ investment banking operations, which include its trading, advisory and underwriting units, generated just over £3 billion ($4.6 billion) in revenues this quarter – a commendable performance considering the fact that depressed debt market trading conditions made it difficult for banks to book profits in the market towards the end of the quarter. After all, the fixed income trading unit contributes to roughly two-thirds of this investment banking revenues for Barclays.

The equities desk deserves a pat on its back for this, as it churned out revenues of £825 million ($1.25 billion) for the quarter – the highest since the downturn of 2008. The bank’s strength in the equity and debt underwriting markets also translated into handsome fee revenues for the bank – reinforcing our view that Barclays’ investment banking division will continue to remain its biggest source of value over the years to come.

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Notes:
  1. Barclays PLC Announces Leverage Plan, Barclays Press Releases, Jul 30 2013 []
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