Tuesday, September 17, 2013

Is Barclays raising capital simply to absorb existing losses on its balance sheet?

In its independent analysis of Barclays, PIRC, a UK institutional investor consultancy firm, raises the question of is the bank raising capital simply to cover losses that already exist on its balance sheet.

Regular readers know that this question would be easy to answer if banks like Barclays were required to disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

With this information, market participants could independently assess the exposure details and determine if and where any losses might be.

Barclays AGM in April 2013 was against a backdrop of the company denying the PIRC analysis that it needed more capital due to overvalued assets, whilst at the same time seeking a general authority to issue new shares. 
The rights issue announced in July 2013 as a result is contrary to that denial and there will not be an EGM to give accountability for the rights issue and its reasons. 
Furthermore, inspection of the rights issue announcement reveals that the story in it does not quite stack up. Barclays is saying that its £5.8bn equity capital raising, is to reduce “leverage” (gearing). 
That might be the case in its IFRS accounts where it is not booking the £4.1bn losses that the PRA has identified and is the substantial reason for the rights issue. However, when adjusted for the loss, the proper accounts would show that the bulk of the equity capital raising is to deal with the overvalued assets. 
Therefore the substantial reason for the rights issue is not to reduce gearing it is funding the loss that the PRA has identified that Barclays is not putting through its IFRS books. The explanations not matching is inherently a problem with running two sets of books. 

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