Morgan Stanley's warning of the risk to Barclays' capital base as bad debts and structured credit writedowns stack up and core banking revenues decline sent the bank to the bottom of the benchmark index last night.
The broker, which was among the first to anticipate HSBC's mammoth rights issue, said that under its base case, even after selling the iShares exchange traded funds business, the bank may end up needing an extra £4bn in capital between now and 2011.
The more onerous bear case, which factors in the impact of a more severe global recession, anticipates the bank's participation in the Government's asset protection scheme (APS), which could potentially see Barclays issuing up to £12.6bn in "B" shares and the Treasury assuming a 39 per cent stake in the bank.
"Like many other banks, Barclays faces a confluence of headwinds over the next part of the cycle," Morgan Stanley said. "Four of the material headwinds come from falling interest rates, falling underlying investment banking revenues, further marks on credit market exposure and finally the reality of the global recession and what this means for bad debts."
It added: "Reassessing each component suggests to us that Barclays needs to address its capital options again in this cycle."
The concerns sparked a round of profit-taking in the stock, which has enjoyed strong double-digit gains in recent sessions. As a result, Barclays was almost 7 per cent, or 7.5p, lighter, closing at 105p.
In the wider sector, HSBC was 5.6 per cent or 22.2p behind at 371p as its nil-paid rights issue shares became available for trading on the market.
Lloyds Banking Group, which was 0.9p firmer at 55.3, proved more resilient, despite Credit Suisse issuing a short-term "sell" rating. The investment bank said that while it remained "fully comfortable" with the balance sheet following the bank's participation in the APS, "the valuation is now overly ambitious".
The broker set the same short-term rating on Standard Chartered, which buckled, easing by 1.6 per cent or 15p to 895p.
"We think [the stock's] premium valuation is at risk given the slowdown in Asia," Credit Suisse said, pointing out that four of the bank's main operating economies – Hong Kong, Singapore, Korea and Taiwan – saw declines in gross domestic product in the final quarter of last year.
Overall, the FTSE 100 was 25.9 points ahead at 3,842.8, while the FTSE 250 gained 10.7 points to 6,272.4. Mining and oil and gas stocks rallied again, as the price of leading metals and that of oil strengthened in response to a weaker dollar.
Anglo American led the miners, swinging to 1291p, up 5.9 per cent or 72p while Kazakhmys jumped to 368.5p, up 5.3 per cent or 18.7p.
Cairn Energy was the strongest of the oil issues, climbing to 2010p, up 4.4 per cent or 86p. Tullow Oil was 4.9 per cent or 39p ahead at 834.5p.
Inflationary fears, which were first aired after the US Federal Reserve unveiled a multibillon-dollar government bond buying programme, helped the price of gold, which rallied past the $960 per ounce mark at one point in the day. The move helped Randgold Resources, up 1.8 per cent or 65p at 3550p, supplement its gains from the previous session.
Elsewhere, Redrow retreated to 136.5p, down 2.5 per cent or 3.5p. Steve Morgan, the former boss and co-founder of the housebuilder, was last night appointed to the board as deputy chairman and chairman designate. Chief executive Neil Fitzsimmons, on the other hand, will step down from his position on Monday.
In response, Panmure Gordon switched its stance on Redrow to "buy" from "hold", highlighting the prospect of a share price rally in the coming weeks.
"Mr Morgan is synonymous with success at Redrow, and in our view offers the group strong leadership in depressed market conditions," the broker said.
Yell, the directories group, made the most of its last day on the mid-cap index, rising by 14.5 per cent or 1.75p to 13.75p, with market chatter suggesting a large stock overhang had been cleared. The stock will move down to the FTSE Small Cap index next, as the results of the recent index review are implemented.
Lonmin, the platinum miner which will move up to the FTSE 100 following the reclassification exercise, saw its share price slip to 1367p, down 6.5 per cent or 96p, as investors bank profits from recent gains.
Investec aided the trend, which said the share price "had run away from underlying fundamentals", by switching its stance on the stock to "sell" from "hold".
Among smaller companies, the AIM-listed internet publisher and advertiser Media Corp soared by 70 per cent or 0.88p to 2.13p after announcing the receipt of a number of possible offer approaches.
York Pharma, the speciality pharmaceutical group, was 9.5 per cent or 0.25p ahead at 2.88p after the company said that it was still engaged in discussions regarding a possible offer.Reuse content