Barclays shares sink on rights issue

A regulatory-driven fundraising, and lacklustre half-year figures, have hit Barclays' shares - but the deep discount implied by the rights issue pricing is hard to ignore

July 31, 2013

by John Adams

With half-year figures that were scarred by mis-selling provisions, and with a regulatory-driven £5.8bn rights issue, it’s unsurprising that Barclays’ (BARC) shares have struggled. Indeed, they slipped over 6 per cent on the back of these announcements and have fallen over 10 per cent since a rights issue was first mooted.

IC TIP: Hold at 288.4p

The fundraising became necessary after June's review by regulators revealed a £12.8bn capital shortfall - based on a minimum 3 per cent leverage ratio. Barclays will therefore part-plug the gap with a one-for-four rights issue, priced at 185p a share - representing a deep-looking 40.1 per cent discount. Espirito Santo reckons the dilutive effects of the move will cut its 2014 EPS forecast by 20 per cent to 39p. Barclays will also sell up to £80bn worth of assets and raise another £2bn by issuing so called CoCos (loss-absorbing securities that convert to equity in a crisis).

The prospect of carrying so much extra capital hasn't impressed. "We expect incremental returns attributable to the holding of this additional 'surplus' equity to be low," says banking analyst Ian Gordon of Investec Securities. While the irony of raising capital, while simultaneously bringing forward plans to distribute 40-50 per cent of earnings as dividends, hasn't been missed. "To announce an increase in the dividend for next year at the same time [as the fundraising] is a contradiction," remarked Justin Cooper, chief executive of Capita Registrars.

The half-year figures hardly inspired, either. Admittedly, the credit impairment charge fell 5 per cent to £1.63bn, but another £1.35bn was set aside for payment protection insurance mis-selling redress, along with a further £650m for interest rate product mis-selling. Even after stripping out those charges, adjusted pre-tax profit fell 17 per cent to £3.6bn - reflecting £640m of costs associated with restructuring efforts. The UK unit’s adjusted profits were merely flat at £632m, while the European side’s loss soared to £709m. Still, strong trading volumes helped boost the investment bank’s profits by 7 per cent to £2.39bn.