Opinion is divided whether the rushed announcement of a rights issue from Barclays (LSE: BARC) (NYSE: BCS.US) should be blamed on an over-aggressive regulator or over-confident management who should have seen the problem coming.
What is clear is that it’s the moving of the goal posts and not deterioration in Barclays’ balance sheet that opened up a £12.8bn capital hole. The Prudential Regulatory Authority accelerated implementation of a recently introduced 3% leverage target and adjusted downwards its measure of Barclays’ capital base, which had been calculated according to EU standards.
Whoever is to blame, the need to raise equity has come as an unwelcome blow to existing investors. But it has presented a buying opportunity for investors like me who favour the long-term prospects for the bank but have been standing on the sidelines.
The investment case for UK banks is delicately poised between the upside from a reinvigorated economy operating on historically low valuations, and the low-likelihood but high-impact risk of a blow-up in the eurozone or banking sector. Bolder investors have made a mint by backing them, but stock market cowards such as me have been more concerned to avoid the downside risk.
Not so very long ago, I’d rehearsed the positive long-term outlook for Barclays in contrast to Lloyds. Barclays’ world-class investment banking, cards and African businesses offer attractive growth prospects. Lloyds is enjoying positive momentum from its time in the privatisation sun, but its longer-term prospects are limited by the size of the UK economy. The fact that Lloyds is proposing paying out 70% of earnings as dividends shows how little scope it has to reinvest.
The rights issue has done little to reduce Barclays’ long-term prospects, delaying its RoE targets by a year because of the drag of additional un-deployed capital. But it has made Barclays safer, by increasing its capital base. And it made a cheap stock, trading at 0.7 times book value, cheaper still. Take decent long-term prospects, reduce risk and make it cheaper, and that looks a good deal to me.
I was happy to buy in at 286p last week. Taking up the right issue will reduce my all-in cost to 266p per share, which is a 6% discount to the theoretical ex-rights price. That discount represents the cost the market has extracted in response to the capital hole debacle: bad news for existing shareholders but a good opportunity for new buyers like me.
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> Tony owns shares in Barclays but no other shares mentioned in this article.