Barclays reassurance boosts sector higher

Barclays' move to reassure investors over the health of its books and its capital standing encourages buying in the sector

Morningstar.co.uk Editors 26 January, 2009 | 9:12AM
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Barclays moved to reassure investors Monday morning after the bank’s market value was halved in the space of a week to close at just 49.8p on Friday amid fears it will be unable to raise capital and will be forced into nationalisation. In an open letter released this morning, Barclays chairman Marcus Agius and chief executive John Varley said the group has £36 billion of committed equity capital and reserves and added that “we are well funded, and we are profitable.”

In order to allow investors to see the figures for themselves, the open letter announced that Barclays 2008 results release will be brought to Monday 9 February.

On this day the bank will report pretax profit for the year “well ahead of the consensus estimate of £5.3 billion”, a figure that mainly reflects strong operating profit generation. It also claimed that capital resources well in excess of regulatory requirements create a performance cushion and the bank will not be seeking to raise further capital.

Today’s statement also revealed £8 billion of gross write downs relating to credit market exposures in Barclays Capital—a level that the bank said it is able to absorb thanks to the strong and diversified income performance in Barclays Capital and revenue generation in the rest of the group. The bank concluded that these figures demonstrate that although it has been heavily impacted by the credit crunch, Barclays’ income generation was at a record level in 2008, enabling it to withstand this impact and still produce strong profits.

Responding to the release, Evolution Securities said the bank’s capital position could benefit further from two other sources. Firstly, citing the UK government’s measures announced 19 January, the broker said the procuring of insurance would have the effect of reducing capital consumption at the bank, which would allow the writing of new business in the UK. And secondly, the Financial Services Authority is attempting to reduce the pro-cyclical effects of the International Basel Accord—a reduction that would be a source of further ratio strengthening.

Evolution added, however, that it would like to know how the bank has avoided the losses reported by others of late. “Certainly buying a subprime lender (EquiFirst) and bidding for ABN in 2007, and then buying a Russian bank (Expobank) in H1 2008 do not seem to be the actions of a bank “battening down the hatches” in preparation for a 50 year storm,” the broker said in a note to clients.

The broker reiterated its Reduce recommendation on the shares, although they last week collapsed through Evolution’s target price of 140p.

At 9.00am, Barclays led the FTSE 100 risers, up 28.5% or 14.6p at 65.8. The bank’s move to reassure helped prompt buying elsewhere in the sector, with Lloyds Banking Group up 15.8% at 57.1p and Royal Bank of Scotland 12.4% higher at 13.6p. Financials’ gains helped the FTSE 100 index to open ahead on Monday, up 36.89 points at 4,089.36.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Barclays PLC263.65 GBX2.51Rating

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