Market Report: Barclays wobbles amid capital concerns
Wednesday 20 January 2010
Parts of the banking sector were unsettled last night, with Barclays falling back as the bears moved in on capital concerns.
The stock slipped to 312.1p, down 1.8 per cent or 5.65p, on worries about the latest regulatory reform proposals from the Basel Committee on Banking Supervision, with Credit Suisse saying that the changes could open up a "sizeable capital deficit". On its numbers, the bank's capital base would slide from 9.6 per cent to 5 per cent under the new proposals, which may yet be altered.
An immediate move back to a core tier 1 equity ratio of 8 per cent "would require £17bn of equity on our figures", the broker said, though it noted that the bank has up to three years to fund this gap in practice. Moreover, Barclays should be able to generate enough capital – about £20bn of equity tier 1 capital over the next three years, according to Credit Suisse – to substantially offset the deficit.
"In theory, it is possible that Barclays can manage the transition to the new Basel rules without an external capital raise. But we believe this would require a substantial tightening-up of the business over the next three years, the potential disposal of BlackRock shares, and the freezing or even removal of the recently reinstated dividend," the broker said. "In practice, restraining the bank to such an extent might not – understandably – be the preferred choice of management. We don't expect any firm decision from Barclays until the Basel rules are better understood, but we think a capital raise at some point in the future cannot be ruled out."
In the wider sector, Exane BNP Paribas dampened sentiment around HSBC, which closed at 699.3p, down 0.7p, after the broker pointed to better value opportunities elsewhere. Exane said that while it regarded its underlying forecasts for the group as broadly consensual and considered the stock as a classic "defensive", it expected HSBC to underperform banks that were more leveraged to the economic recovery, and whose valuation metrics were particularly depressed and providing scope for some near-term strength.
Barclays, Lloyds, down 1.51p at 57.07p, and Royal Bank of Scotland, up 1.1p at 38.34p, for instance, continue to trade on undemanding metrics, the broker explained. Exane also highlighted Standard Chartered, down 1.5p at 1559.5p, its "preferred Asian play".
Overall, the FTSE 100 was firm, rising by 18.75 points to 5513.14, while the FTSE 250 fell by 16.66 points to 9555.41. The mood was subdued following the latest inflation figures, with traders expressing concern about the fact that consumer prices rose at their fastest annual pace in nine months in December.
"Even allowing for the unfavourable statistical distortions coming from sharply falling oil prices a year ago and the December 2008 VAT cut, the data will not go down at all well at the Bank of England," Howard Archer, chief UK and European economist at the forecasters IHS Global Insight, said, pointing out that, at 2.9 per cent, the December figure was substantially above the Bank's target level of 2 per cent.
United Utilities was 12.6p stronger at 503.5p thanks to Deutsche Bank, which said the stock was the cheapest in the UK water sector. "With one of the worst performances in the European utilities sector in 2009, UU now trades at a 9 per cent discount to regulatory asset value, offering an attractive entry point in the stock," the broker said, repeating its "buy" stance and pointing out that the shares also offered an attractive dividend yield of 6.9 per cent. "Although there is some uncertainty over the sustainability of the dividend, it is much more attractive than the average yield in the sector of just over 5 per cent."
Elsewhere, Prudential was in focus, easing by 1.5p to 613.5p, after Goldman Sachs moved the stock on to its "conviction buy" list despite expressing caution on the UK life insurance sector. The broker said that while the stock did not appear cheap on traditional valuation metrics, it was inexpensive on an enterprise multiple basis. This was despite it having "the best growth opportunities" in the sector, Goldman noted, raising its target price for the stock to 740p from 590p.
The broker was less keen on Standard Life, which fell by 1.6p to 210.1p after Goldman moved it to "neutral" from "buy". "Our latest analysis shows Standard Life to be relatively expensive on an enterprise value/Ebitda basis and that earnings growth may be somewhat constrained in spite of potentially rising equity markets," the broker said, keeping its target price for the stock unchanged at 227p.
Further afield, Morgan Stanley supported Associated British Foods, the Primark-owner that was 13.5p higher at 882.5p after the broker revised its view to "overweight" from "underweight", with a revised 980p target, compared to 730p previously.
"We expect the company to achieve double-digit [earnings] growth in 2010, with the three key businesses, Primark, Sugar and Grocery, all hitting a sweet spot," the broker said, adding that Primark in particular remained key to its investment case and that, based on its propriety survey, it expected the division to "maintain solid momentum in the coming quarters".
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