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Why I Still Expect Barclays PLC To Deliver Substantial Gains

Barclays (LSE: BARC) (NYSE: BCS.US) shares fell hard earlier this week when the company announced a clutch of bad news with its half-year results. The biggest news was the fact that the banking regulator (the Prudential Regulatory Authority) is demanding that Barclays adds £12.8bn to its coffers by June 2014.

Bosses have decided that a big chunk of this can be raised from tighter controls and future earnings. However, the bank will seek to quickly raise £5.8bn from shareholders. This will be achieved through a heavily discounted placing of new shares. Soon — the exact timetable is yet to be confirmed — shareholders will be given the chance to purchase one additional share in the bank for every four that they already own. The price of each of these new shares will be 185p, a 40% discount to the price that Barclays shares traded at before the announcement.

Share price reaction

To this news, Barclays also added another £1.3bn of PPI insurance compensation costs. The result is that since these announcements, shares in Barclays have lost 6%.

As a holder, I actually find this encouraging. Despite the big fundraising and the considerable PPI cost, Barclays shares are still ahead in 2013.

Though fears of a fund raising have been proved correct, there are enough investors seeing value in Barclays to support the shares. Now that the fundraising has been announced, a lot of uncertainty has evaporated. The Prudential Regulatory Authority has declared the level of capital that Barclays must hold. I cannot see how the PRA can change its demands anytime soon without incurring a catastrophic loss of credibility.

Valuation

Once the fundraising is done, investors will return to valuing Barclays on the basis of its profits, dividends and prospects. Currently, Barclays is expected to make £5.5bn of profits in 2014. Comparing that with today’s market capitalisation of £37bn, even with a larger number of shares in issue, Barclays still trades on an undemanding valuation.

I shall be taking up my rights for new shares and expect the shares to be significantly higher by the end of 2013.

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> David owns shares in Barclays.