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Barclays facing levy pain

SHARE TIP: Barclays (BARC)
June 17, 2010

BULL POINTS:

■ Bad debts improving

■ Pays a dividend

BEAR POINTS:

■ Painful bank levy on the way

■ Investment banks facing regulatory scrutiny

■ Spending cuts could hurt borrowers

■ Sentiment hit by sovereign debt worries

IC TIP: Sell at 288p

UK banks are already struggling with bad debts as the economy emerges from recession, but the new coalition government could be about to make life for the lenders even tougher. Earlier this month, Chancellor George Osborne indicated his intention to push through a bank tax, even though enthusiasm for a levy is waning internationally. While the G20 has effectively ditched the idea, details of the UK levy could even appear with the Budget on 22 June. Such measures will undoubtedly hit all UK banks - but Barclays, with a big and profitable investment banking operation, could be one of the most exposed.

IC TIP RATING
Risk ratingMedium
Time scaleShort term

That's certainly what analysts at broker Evolution Securities think - they've calculated that Barclays could be facing a huge £1.9bn per year hit, equivalent to around a quarter of Barclays' annual profits. That will come mainly from extra taxes, but also reflects the impact of fiscal austerity measures on loan growth and bad debts in its key markets. Such considerations led the broker, earlier this month, to downgrade its estimate of Barclays' earnings for 2011 by an eye-watering 44 per cent.

The new government also sounds enthusiastic about splitting lower-risk retail banking from higher-risk investment bank operations as a means of reducing systemic risk in the banking system. And while action here is hardly imminent - a commission is being established with a one-year timeframe in which to report on this - it's an uncertainty that will do little to bolster sentiment towards a lender that generates roughly half of its profits from investment bank-type activities. Broker Evolution reckons that the investment banks, generally, are facing an "increasingly hostile" regulatory environment.

ORD PRICE:288pMARKET VALUE:£34.7bn
TOUCH:288-289p12-MONTH HIGH/LOW:394p255p
DIVIDEND YIELD:2.2%PE RATIO:11
NET ASSET VALUE:486p  

Year to 31 DecPre-tax profit (£bn)†Earnings per share (p)†Dividend per share (p)
20066.4266.631.0
20076.2260.634.0
20085.1451.411.5
20094.5924.12.50
2010*5.7225.16.27
% change--+151

*Evolution Securities' estimates (adjusted - not comparable to prior years)

†Continuing operations

Normal market size:15,000

Matched bargain trading

Beta:2.19

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Longer term, there's also a tougher international regulatory regime to take into account. Proposals from the Basel Committee on Banking Regulation will require banks to hold larger capital cushions with which to absorb losses, potentially meaning a bigger burden for those like Barclays with relatively riskier investment bank operations, and to carry a big stock of highly marketable liquid assets such as government bonds. But bigger capital cushions mean less resources with which to lend and liquid assets, being low risk, are also low return. And while Barclays isn't overly exposed to European sovereign debt, which is more of a problem for French and German institutions, ongoing default fears are likely to mean bad news for all bank shares, Barclays' included.

Still, Barclays does deserve some applause. Look back to the autumn of 2008, and it was difficult to see how Barclays could avoid following Royal Bank of Scotland (RBS) and Lloyds into state ownership after hefty government bailouts. Yet the bank rebuilt it capital base through a fundraising with various Middle Eastern investors, and by selling its Barclays Global Investors (BGI) asset management operation. While the approach was costly, with BGI a big profit centre and the terms of fundraising criticised for being too generous, it has nevertheless left Barclays with a decent enough tier-one capital ratio of 9.8 per cent. It also left management free to pay dividends, unlike RBS or Lloyds, and free of state-directed lending targets.

What's more, and in line with the sector, the lender's bad debt problems have been diminishing. Barclays' first-quarter trading update at the end of April reported that its impairment charge had fallen 35 per cent since 2009's first quarter. That said, government austerity measures in the UK and possibly in other key markets such as Spain could mean borrowers find repayments tougher in future. After all, the UK government has already outlined £6bn-worth of spending cuts, with further cuts of 15 per cent to 20 per cent being anticipated in the Budget later this month. "The fiscal austerity measures will inevitably prolong the impairments cycle," says Evolution. "They can only imply lower disposable income."