Barclays confirms £5.8 billion rights issue
Barclays has asked for a £5.8 billion plug from shareholders as it faces pressure over its £12.8 billion capital shortfall.
As the bank reported results for its second half on Tuesday, the market responded to the larger-than-expected rights issue by sending the stock down 6% in morning trading.
The sizeable capital shortfall, as determined by the Bank of England, is nearly double what analysts expected. This casts a shadow over the financial health of Barclays. The bank also announced it would take a further £2 billion charge for mis-selling of payment protection insurance. This takes the total provision to £4 billion, as the bank already set aside £1.35 billion in the first half.
"After careful consideration of the options, the board and I have determined that Barclays should respond quickly and decisively to meet this new target," said chief executive officer Antony Jenkins. The chief executive, who has been in the big chair for 11 months, conceded that it was "early days" for the bank, and that it has "a long way to go".
The cash call means Barclays needs to push back its targets for return on equity by a year, to 2016.
The rights issue will be priced at a 40% discount to Monday's share price of 309.5p. In addition to the £5.6 billion required from shareholders, another £2 billion will be raised from the bond market.
Pre-tax profits came in at £17 billion for the six months to June, compared to £871 million in the same period last year. Pre-tax profits on an adjusted basis were 17% below expectations, at £3.6 billion.
Investec analyst Ian Gordon maintains his 'buy' rating for Barclays following Tuesday's news. His target price of 345p is based on long-term growth expectations and cost of debt. Still, he pointed to a potential for downgrading his return-of-equity expectations for 2015 by 10.4%, based on the effects of rights issue.
"Obvious weakness" is the scenario of the day, concludes Gordon, as Barclays' investment-banking unit performed worse than its US peers. The £2 billion additional provision for mis-selling was also worse than Investec expected. Better numbers were seen from UK retail, Barclaycard and corporate banking, offsetting worse performance at Barclays Capital.
This story was written by our sister website Interactive Investor
A way a company can raise capital by creating new shares and invite existing shareholders in the company to buy these additional shares in proportion to their existing holding to avoid a dilution of value, which means keeping a proportionate ownership in the expanded company, so that (for example) a 10% stake before the rights issue remains a 10% stake after it. As an added incentive, the new shares are usually offered below the market price of the existing shares, which are normally a tradeable security (a type of short-dated warrant) and this allows shareholders who do not wish to purchase new shares to sell the rights to someone who does.
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.