Two down. Now the pressure mounts on Barclays and Lloyds

After the RBS and HBOS rights issues, two other household names may soon have to raise capital. By Simon Evans
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The Independent Online

Reputations are forged in the bull market but in many cases lost when forced into the clutches of the bear.

Andy Hornby, chief executive of Halifax Bank of Scotland (HBOS), finds his personal stock plummeting at a rate of knots after last week's £4bn change of heart, which must be leaving most of the bank's two million retail shareholders scratching their heads. One commentator rather dramatically said that Mr Hornby should be ashamed of himself.

Similarly, Sir Fred Goodwin's recent volte-face in tapping up his Royal Bank of Scotland (RBS) shareholders for £12bn to shore up an ailing capital base has left his reputation in shreds. His exit later in the year is widely anticipated.

This week is likely to see other British banking bosses in the dock, with Lloyds TSB's Eric Daniels releasing an interim management statement on Tuesday that will reveal the extent of any further writedowns and the corresponding need for a rights issue.

"Lloyds TSB has been a strong performer on the basis of a strong capital base and a good funding position," says Alex Potter, banking analyst at stockbrokers Collins Stewart. "However, we are becoming increasingly concerned. Lloyds grew its property and construction lending book by 34 per cent in 2007, the highest of the UK majors.

"It is the most domestic-focused of the UK majors – virtually all of its profits come from home – and, with other banks doing rights issues, no longer so explicitly well capitalised. Lloyds would be keenly exposed to a recession and therefore a capital raise cannot be ruled out."

This week should also see pressure build ahead of Barclays' own interim management statement on 15 May, when many analysts predict further losses will undoubtedly necessitate a capital raising of some kind by the embattled chief executive, John Varley.

The most pessimistic City watchers suggest that writedowns of the same magnitude as those suffered by RBS would imply the need to raise more than £6bn. More measured forecasts put toxic writedowns in the order of £3bn.

A further £2bn could also be needed to boost capital ratios to an "acceptable level". A so-called equity tier-one ratio of less than 5 per cent is unlikely to go down well with long-term investors, or with the Bank of England either. Indeed, Mr Varley himself said recently: "This is the time for strong ratios."

Ian Gordon, analyst at the investment bank Exane BNP Paribas, says: "We sense that Barclays, and others, will eventually be handbagged into raising capital ratios. However, I wouldn't bet on Barclays relenting as soon as its statement of 15 May – it has hardly seen a euphoric welcome for RBS and HBOS's unnecessary rights issues."

At the bank's annual general meeting in April, Mr Varley did not dismiss the need for a Fred- or Andy-style rights issue any time soon, saying: "We never rule out raising equity capital. However, there are other ways of increasing our equity ratio, including managing the overall size of the balance sheet and generating good profits."

But, of course, Barclays' bosses and rights issues have never been comfortable bedfellows. Twenty years ago, the bank's then chairman, Sir John Quinton, presided over the deeply discounted raising of £921m, intended to fund a move into property and investment banking. The onset of the recession made of a mockery of that, ultimately costing him his job.

So if, as Mr Varley, his chairman Marcus Agius and anyone close to Barclays will care to tell you, a rights issues is the least favoured option, it seems likely that a cash call to the Singaporean sovereign wealth fund, Temasek, and the China Development Bank is on the cards instead. The Asian giants are already major shareholders in Britain's third biggest bank, following their purchase of a collective stake of just over 5 per cent during Barclays' ultimately abortive bid for the Dutch bank ABN Amro last year.

To allow its shareholders to protect their stake, the group pursued a proportionate buyback. Barclays' battered investors will probably not have such a luxury this time around.

Temasek bought its shares in July at 720p and, after a collapse in the price to 456p, is sitting on paper losses of more than £300m. A spokesman for Temasek declined to comment on speculation it could take a greater stake in Barclays.

Pursuing the sovereign wealth route would enable Mr Varley to sidestep the stink of a rights issue, but is unlikely to completely eradicate the pressure being heaped upon him. He has long been in the shadow of Barclays Capital's charismatic and considerably better paid boss, Bob Diamond.

The City grapevine is full of talk of bust-ups between the two. As with tales of Mr Diamond having a Picasso hanging in his downstairs toilet, much of the chatter is probably hyperbole.

But if the surprise departure last Friday of Barclays' chief operating officer, Paul Idzik – amid claims he was fed up of the bickering and chicanery at the top – is anything to go by, then suggestions of growing disquiet may have some merit.

"Mr Varley dodged a bullet when he didn't get ABN Amro," said a City analyst, who declined to be named. "He now needs to stop playing games and come clean on what Barclays is planning."

This week we might, at last, discover exactly what Mr Varley is up to. Once we do, perhaps another City reputation could find itself in tatters.

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