Strategy

Bank bailouts: Insufficient funds

Will London-based Barclays Bank need a helping hand from Her Majesty's Treasury?

There is this disconnect between how well our business is doing and our share price,” says Jerry del Missier. “At some stage, they will converge.”

A native of Sudbury, Ont., del Missier is president of Barclays Capital, the investment-banking arm of London-based Barclays Bank PLC. He’s in a meeting room on the 32nd floor of the former headquarters of Lehman Bros. Holdings Inc. in New York City, framed by a shaft of sunlight. Del Missier is explaining why Barclays Bank, reported better-than-expected results for 2008 — net income of £5.3 billion, up from £5.1 billion in 2007. From a franchise perspective, he says, 2008 was “our most successful year ever.” So why is Barclays stock, which was trading at 422 pence a share this time last year, now hovering around 112 pence?

Barclays Capital picked up much of Lehman Bros.’ North American assets for US$1.75 billion last September. Considering the real estate alone has been valued at US$1.5 billion, it was an extraordinary deal. Many I-banks subsequently disappeared, creating what del Missier describes as a “favourable” competitive environment. With operations on six continents, and plans to expand the bank’s Canadian operations, BarCap offers financing on a global scale.

But many wonder if BarCap’s parent may have to take British government funds to survive.

On March 15, floundering American International Group Inc. announced that Barclays Bank PLC was a major counterparty to its credit default swap businesses. (According to AIG’s statement, Barclays benefited indirectly from a total of US$8.5 billion in American government funds.) A Barclays spokesperson wouldn’t comment on the bank’s total exposure to AIG, but confirmed it engaged in AIG swaps.

A day later, Barclays confirmed rumours it is shopping its iShares ETF division, worth an estimated US$5 billion. That’s almost half Barclays’ current market capitalization. Erin Davis of Morningstar says this is likely related to the bank’s effort to shore up cash before the deadline for applications to participate in the U.K.’s asset relief program. (If the bank can pay the entry fees, the government won’t claim a stake in its business.)

“Barclays is doing everything it can to keep the government out,” Davis says. Indeed. In 2008, the bank diluted shareholders twice and accepted private financing at rates less favourable than those offered by Her Majesty’s Treasury — actions that may have helped the stock’s slide. “Problem is,” Davis goes on, “no one is paying full price for anything right now.” By selling a performing asset at a low value, Davis says, Barclays risks cutting off its nose to spite its face.

The following day, the bank was fighting off whistle-blower allegations it had engaged in an international tax dodge worth US$1.4 billion annually — a scheme that allegedly originated at BarCap. “Barclays does not encourage or condone tax evasion,” the bank says in a statement. As to why the bank forced the Guardian to remove several documents from its website: “The documents were commercially sensitive, client confidetial and Barclays property.”

On paper, the bank seems well-capitalized. Barclays maintains £11.5 billion in capital. Geared to nearly £1.5 trillion in assets, that represents a Tier 1 capital ratio of 11.3% — comfortably above the 8% at which U.K. regulators are expected to come calling.

Those assets may experience fresh shocks in 2009, however. What’s more, says Davis, BarCap supplied up to 30% of the revenues the parent bank earned in the past couple of years. BarCap is unlikely to keep that up — Davis pegs growth at just 5% through 2010. Meanwhile, the parent bank is exposed to £77 billion in residential mortgages in the U.K. — a plummeting market.

Back in his shaft of sunlight, del Missier is unequivocal: “We won’t need to take government money.” The deadline for participation in the U.K. asset relief program is March 31; a release on Barclays’ website posted March 16 indicates the bank is now “in dialogue” with Her Majesty’s Treasury. Watch this space.