Barclays Gains from U.K. Support for Small Businesses Amid Weak Economy

Barclays (NYSE:BCS) has signed up with the British government to be a part of its new stimulus package planned for small businesses. ^[1] The largest U.K.-based bank joins competitors The Royal Bank of Scotland (RBS) Group (NYSE:RBS), Lloyds (NYSE:LYG) and the U.K. arm of Banco Santander (NYSE:STD) over plans to extend loans worth £20 billion ($32 billion) to struggling small businesses across the country at discounted interest rates. Banks will be able to maintain their margins for these loans as the government will act as a guarantor to the £20 billion funding – significantly lowering the cost of raising these funds.

We maintain a $15.30 price estimate for Barclays’ stock, which is around 5% below its current market price.

See our full analysis for Barclays’ stock

The British government has been putting its back into propping up small businesses across the country even as weak macro-economic conditions threaten to force a recession in the region.

After the economic downturn of 2008, the government mandated that banks lend out a minimum amount to small businesses each year as a part of its ‘Project Merlin’ initiative. But Project Merlin faced the notable hurdle of banks just not getting enough loan requests from small businesses – largely because of the high interest rates.

The new stimulus package is the latest bid by the British government to ensure that small businesses have enough cash to sustain themselves in these trying times. In order to address the high interest rate hurdle, the government will help banks raise £20 billion ($32 billion) in funds by acting as a guarantor. The U.K. government’s AAA rating would allow banks to save nearly 1% in funding costs. These savings can then be passed on to small businesses who could avail loans at interest rates up to 1% lower than prevalent rates.

The scheme would help Barclays give out more commercial loans later this year, raising its portfolio of retail & commercial banking loans outstanding by as much as £5 billion ($8 billion). You can see the impact of this increase on our price estimate for Barclays by making changes to the chart above.

It must be noted, however, that the British government is acting as the guarantor to the banks’ funding sources – not to the banks themselves. This means that the risk of a particular loan going bad rests on the bank. The bank is expected to ensure loan quality through its existing due diligence process.

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1. UK’s Osborne Launches Stimulus Program To Channel GBP20 Billion To Small Firms, Fox Business, Mar 19 2012 [↩]