Although Barclays trumpeted profits of GBP826 million in the first quarter of 2009, research and analysis firm Datamonitor found signals suggesting that all is not so well at the bank. The reasons are increased impairment charges and write-downs on loan book as well as intention to sell off its key assets.
Barclays has announced that it is currently seeking to sell Barclays Global Investors, a large fund manager with an estimated GBP1 trillion on its books, for around GBP6.6 billion. This comes hot on the heels of the bank’s recent arrangement to sell off its iShares division to CVC Capital Partners for GBP3 billion. Barclays has announced these deals despite reporting good profits in the first quarter and claiming that it already has adequate funding to ride out the current storm. Indeed, to improve its capital ratio and avoid a government bailout, the bank raised GBP7 billion from investors in the Middle East in late 2008.
Roderick Logan, financial services analyst with Datamonitor, says: Given this funding, questions regarding Barclays’ motives remain. The iShares business is a leader in exchange traded funds, a market that is considered to have plenty of strong growth potential, while Barclays Global Investors is seen as a strong and lucrative business. As a result, the sale of the businesses could be seen as a backwards step for a bank that is looking to diversify its earnings.
Nevertheless, there are several possible reasons for the bank to make these moves. Divesting the two companies would help Barclays to raise its core tier one capital ratio, although this is currently 6.7%, which the bank has insisted is fine. To add credence to its claim, Barclays recently passed a Financial Services Authority-enforced stress test to ensure that it does not need to be involved in the government’s Asset Protection Scheme.
However, Barclays’ results did show a 79% increase in impairment charges and chief executive John Varley stated that the proportion of loans written down in 2009 is likely to be around 1.5%, which is at the top of its forecasts. Despite this, the bank managed to turn over a respectable profit in contrast to the results of the government-owned banks RBS and Lloyds.
It seems possible that, in its efforts to avoid government funding, Barclays has instead come under the influence of its Middle East investors, who may have forced its hand towards such a move, continues Logan. Indeed, the Qatari investment authority has stated that it intends to increase its stake in the bank. The other possibility is that the bank saw future problems with its balance sheet and took action to avoid them.
The disposals represent a sound short-term option to allow the bank to boost its capital ratio incase the economic picture deteriorates further. However, in the long term, this strategy will seriously diminish Barclays’ future growth prospects, suggesting that the Middle East investors may stand to lose out on their investment.
The full report is available here.
L.D.