Barclays 1H13 – Big rights issue to help solve leverage ratio shortfall
The UK Prudential Regulation Authority (PRA) recently brought forward the date of compliance by UK banks with the new Basel III leverage ratio ((Common equity Tier 1 capital)/(Adjusted on and off balance sheet total assets)) leaving Barclay’s short (3% required, current 2.2%) by an estimated ₤12.8bn, despite being fully compliant with Common equity Tier 1 ratio of 8.1% as at 30 June 2013. Barclays propose to meet the shortfall by:
- A ₤5.8bn rights issue at 185 pence (a 40% discount to the close price) which is the largest amount ever raised by Barclays
- A decrease of leverage exposure by ₤65bn to ₤80bn
- Additional Tier 1 issuance to ₤2bn
- Retained earnings of circa ₤2.5bn to cover the balance
The current quarter’s results were hit by non recurring charges of ₤2,126m for: an additional payment protection insurance (PPI) provision of ₤1,350m, an interest rate hedging provision ₤650m and ₤126m restructuring costs resulting in a pre-tax profit of ₤142m. Excluding non recurring income and charges underlying pre-tax profit was ₤1,931m.
Lloyds 1H13 – Continues to improve
Almost across the board, Lloyds improved its ratios with return on equity (ROE) a fairly normal 7.4%, compared to the last four half year periods when ROE was negative. Total revenue margin, which incorporates the net interest margin and non-interest margin combined were 2.3%, down slightly from 2.4% 2H12, but on a much lower cost base with cost/ income 63.2% versus 80.3% 2H12.
Non-recurring items included another ₤500m PPI provision (taking the total from 2011 to 2013 to ₤7,275m) but, on a positive note, included gains on disposal of assets and ₤780m on the sale of gilts.
It is widely expected that the government will begin re-privatisation of the bank in the coming months, selling down its 39% stake as the share price is above the gross level at which the government paid for the shares.
Key points to note:
- Substantial increase in Group underlying pre-profit from ₤1,521m in 2H12 to ₤2,469m
- Credit quality continues to improve with impaired loans down almost ₤6bn to ₤40.38bn and a corresponding decline in the percentage of impaired loans to total loans of 7.7%, down 0.9% from 8.6% in 2H12
- Statutory pre-tax profit of ₤2,134m versus a pre-tax loss on the last half of ₤150m.
- Strong underlying capital generation with Core Tier 1 capital ratio increased to 13.7% up from 12.0%; on a pro forma fully loaded CRD IV (new EU rules on capital requirements for banks) basis the ratio is estimated at 9.6% from 8.1%
- Lloyds has no plans to issue new share capital or contingent capital instruments
Lloyd’s plan to sell 632 branches to the Co-operative Bank collapsed and as there is no buyer, the group now intends to IPO the business mid 2014. This will mean Lloyds misses the year end deadline for disposal and needs to come to some formal agreement with the EC.
RBS 2Q13 – Uncertainty over “good bank”, “bad bank” review
Mid June the UK government announced it was reviewing RBS and considering splitting the bank into a “good bank” and “bad bank”. Should the split eventuate, I think it likely that senior debt would sit with the “good bank” and anything lower with the “bad bank”.
The government has outlined the reasons they would proceed with a split:
- To support the British economy
- If it were in the best interests of taxpayers
- To accelerate the return of the bank to private ownership
The reasons seem fair and could be justified.
Obstacles to establishing a “bad bank” include:
- Valuation of assets
- Funding and capitalisation of the bad bank
- Need to obtain consent from minority shareholders/ potentially also the consent of bondholders
- Possibility of full nationalisation
- Risk of triggering change of control provisions
- Time to complete a split
- Possibility of triggering another state aid investigation by the EC
EU regulation now makes full sub-debt bail-in a condition of state aid. That means conversion to equity and very high risk of loss, if not complete loss. Further, a split may mean another suspension of discretionary coupons, which was a condition of state aid first time round.
I expect RBS senior debt to be protected until the beginning of 2018, when it is due to become “bail-inable”. The current bail-out of the Co-operative Bank also suggests senior debt would be protected.
Anything below senior debt is high risk, certainly nowhere near investment grade and there are many possible outcomes for investors. Some investors are taking a bet that the government review will see the bank stay together and sub-debt securities may well rally on this news. But the flipside is a big drop in value, probable haircut and possible complete loss. We’ll provide an update when the findings of the review are announced.
Results for 2Q13 improved over the previous quarter with operating profit up 25% to ₤931m and first half profit of ₤1,878 up 17% over the same period last year.
Key points to note include:
- Core bank operating profit of ₤1,212m down 3% from ₤1,252m 1Q13
- Non-core bank losses improved to ₤281m from ₤505m
- ROE 0.8% down from 2.4% 1Q13, but better than 2012 when ROE was -8.4%
- Cost/ income ratio up to 71.4% from 65.9% last quarter
- Gross impaired loans to total loans 8.4%, higher than the previous four quarters and up 0.4% from 1Q13
- Total revenues margin (net interest plus non-interest) 1.8% up from 1.7% 1Q13
- Core Tier 1 ratio of 11.0% (10.7% 1Q13)
Like Barclays and Lloyds, RBS also made a PPI provision of ₤185m and ₤385m for “legal actions and regulatory actions”.