Barclays are bust

really?! I think you will be surprised then to see what emerges over the next six months

there are still 50 trillion in known outstanding cds exposure not to mention the other 400 trillion overall...check out the BIS data

this is far from done

Most of them cancel each other out!

eh?  credit default swaps cancel each other out?  since when do we know who has exposure to who else?  aren't you making a huge leap of faith?  last time I looked it was that one party was exchanging an effective guarantee that a large institution would'nt fail for a rate of interest - that leaves someone exposed to a 90% reduction in the face value of the swap...agree that the huge interest rate swap market to a degree is immaterial because they only fail with substantially higher rates (mostly above 6.5%) but not sure I get the comment about cds (do explain further crofter)...for what its worth I do think that the fact that they are all OTC allows the 'powers' to indefinitely delay settlement etc without being seen AGAIN to interfere with the free and fair markets that we all know and love (YAK) 

clearly not even the experts quite understand all this but I do think that the dollar rally is intrinsically linked to the unwinding of these complex CDO/CMO structures - just don't think that CDSs are the same ballgame....do throw a few pearls though....

The latest news is that Roger Jenkins, the Barclays executive who oversees the bank's principal investments activities, and private equity boss Paul Goodson have met backers of the BPE fund to discuss a potential management buy-out of the firm. This would enable Barclays to remove BPE from its balance sheet and improve capital ratios...

Not sure whether this is just re-arranging deckchairs on the Titanic or not...

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/3868905/Barclays-in-talks-to-spin-off-private-equity-arm.html

More pain and misery for Barclays - my bet on it earlier continues to look more and more rash...

Barclays lost a quarter of its stock market value last night just hours after the ban on the short-selling of banking shares was lifted... Moody's, the credit rating agency, downgraded the rating on a particular form of CDOs widely held by BarCap on Thursday and there have been rumours — denied by both parties — that last week's resignation of Sir Nigel Rudd, the Barclays deputy chairman, was due partly to differences with the chief executive, John Varley, over how such instruments should be valued in the bank's books....

http://business.timesonline.co.uk/tol/business/article5533488.ece

I can't believe I called the bottom for Barclays at 1.97... What a joker!

Yowsers! Barclays up 13% today on reports that it has "passed" FSA stress test and won't need new capital . It is not yet clear if this "pass" factors in the Ishares sale or not.http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5059503/Barclays-shares-surge-on-FSA-green-light.html

Also, quite bullish note reported from Credit Suisse, the bank's house broker -http://www.guardian.co.uk/business/marketforceslive/2009/mar/26/barclay-standardchartered

"The market continues to worry about Barclays capital position. The equity tier 1 ratio at 6.4% is a full 3% below Lloyds Banking Group and Royal Bank of Scotland - adjusted for the asset protection scheme (APS) prepayment fee - and those two banks now have protection against large parts of their portfolios. We sympathise with this, and indeed in our recent upgrade piece of 10 March pointed to a capital raise of £8bn being needed to take Barclays ratio to a level that could withstand a relatively severe stress test. This would be about 8.5% ex APS participation or 7.5% pro-forma for an £80bn APS. Two things have since come to light. First, and most obvious, the potential sale of iShares which could fetch up to £4.5bn according to the press. This would still leave a £4bn gap to our £8bn number, but Barclays  has also reported a strong start to the year. If its guidance of a 130-150bps impairment charge for the year is correct, this would add £1-5bn to capital relative to our base case and stress test respectively."Second, Pillar 3 disclosures have been published and these give us more comfort on Barclays' capital adequacy. The Pillar 3 disclosures appear to confirm that large parts of the trading book are treated on penal standard rules. This means Barclays might be more shielded from trading book capital changes than generally perceived."We therefore believe the "blue-sky" scenario - that Barclays can hold its share count at 11bn versus 7bn in 2007 – while still not our central case scenario, is increasingly feasible. That could deliver net asset value around 274p post a sale of iShares, on our numbers."

This name has been far too volatile recently, but there may be a chance of a return to something calmer.  A lot of noise today around the banks.  Reading the accounts of senior management at RBS make me feel slightly queasy.  Goodwin appears to have been a complete chancer, with no real oversight or financial control.  From Cattles, to Greenwich Capital via dodgy double-dip tax ideas they were charging into every business area, then expanding aggressively with little oversight.  It's frankly such a shocking level of professionalism, you simply rage against the level of compensation.

However, Barclays may be a different proposition.  Whilst they have gone into all the same areas just as aggresively, they may have better management and controls.  If they have quantified and managed their financial risks bette, it is a totally different position.  iShares is a great asset and they could get a decent price for it.  What people seem to overlook is the equity injection by the Abu Dhabi's came with some strings attached.  They have preemptive rights on further stock issuances, therefore they have the legal right to buy Barclays in order to prevent nationalisation.  In my view, it's good value at today's share price of a pound, but the question is whether things get worse or get better and what dangers lurk.  I don't think it will be natonalised, unless the choice assets are given to the Abu Dhabi's.  They themselves would be more interested in control staying largely as is, but there may be a bit of pain for now.  So, if the price falls and oil looks healthy, they'll probably increase their stake and I'd go along for the ride.

A sale of Ishares appears to be imminent, perhaps even as early as this week. Goldmans are in the frame and the price talk is as high as $5bn (£3.4bn), although I find that difficult to believe given the environment and how rushed the sale process is. Barclays is apparently keen to agree the sale by early next week before the Treasury APS test on March 31st. Credit Suisse apparently calculates that they need an additional £8 bn of equity capital so this sale alone is unlikely to cut the mustard. Still, it's impressive to see them battling against nationalisation, rather than rolling over and collapsing like the rest of the UK banks seem to have done.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5039400/Goldmans-joins-the-fray-for-Barclays-5bn-iShares-unit.html

The field of competition is said to include Goldman, Bain Capital, and a consortium led by Hellman & Friedman, the San Francisco-based buy-out firm. http://www.ft.com/cms/s/0/bc6ff444-17e4-11de-8c9d-0000779fd2ac.html?nclick_check=1

But it may not be such a great deal for Barclays:

• Panmure Gordon estimates the division may have contributed as much as 10.0% to Barclays' underlying earnings last year, so the loss of the division will be felt.
• In addition, the structure of the deal could mean that Barclays bears a lot of the deal risk. The Telegraph reported over the weekend that Barclays could provide up to 80% financing, effectively underwriting much of the investment risk.

Perhaps they are better off accepting a bear hug from the UK government...

As I said, they have problems with the British Govt because of the deal with Abu Dhabi.  Agreed it's a bad time to sell this asset, which will be a big growth area, but it may be Hobson's Choice...  If they sell and then there's more bad noise on their books (nobody say Barclaycard) then it will end horribly.

Update Lex in FT says the preemption rights for the Abu Dhabi investors expire end of June.  They are supportive of the funded sale concept  as they can leverage up the cash proceeds.  I think whoever buys iShares right now is going to make out like a bandit, but Barclays are tied in knots.  Maybe they can slow the sale for a few months and then find a new source of capital and keep iShares.  

For those who bought into this stock at around the 100p mark, the time may have come to lock in profits, or at least to reduce exposure.   The logic behind this is I think buying in at 100p was right - it was oversold and weren't hiding problems as some perceived - but it was a bit of a gamble.  However, at 200p a share, the rationale for holding should be based upon investing in the business and the business strategy and there are many uncertainties.   I am not sure just how non-recourse the off-balance sheet structures are, especially with regards those linked to credit cards and unless you go through the prospectuses of the ABSs, it's a guess.  Even if you do, I have found there's plenty of opacity in what they do.  They have plenty of emerging market and leverage loan exposure, both of which is a problem on the horizon, particularly in leverage land.  They may choose to bolster the balance sheet with rights offers, conversion of pref shares etc, even though government involvement is remote.  None of this is going to kill the company and if you want a bit of financials in your portfolio, fair enough.

Someone said that the smart investor takes the middle 60% of the price rise and leaves the first 20% and last 20% to someone else.  I think 100p - 200p was the 60%.

Bob Diamond is clearly pretty focused on telling the world that there's a lot more juice in the tank... http://uk.reuters.com/article/fundsNews/idUKLNE53F02B20090416

"You have to look at which banks have improved their competitive position during this period, and in that regard I don't think it's a one-off," Bob Diamond, president of the bank and head of Barclays Capital, said in an interview on Bloomberg Television. Diamond said first-quarter results from Goldman and Wells Fargo had offered "good news for the whole industry". "It's been quite a while since we've seen analysts talk about revenue as opposed to writedowns and balance-sheet risks," he said.

Personally, I think that's hogwash - a number of its competitors are in disarray, I agree and they got some good Lehmans assets on the cheap, but I can't believe there's no more bad news in their balance sheet or that this is somehow "good news" for the industry. We will know more on April 23rd, I guess, when they give Q1 results at the shareholder's meetings and we discover what shades of carpet they have found to sweep the problem under...

I don't know - I have been pretty impressed by the way that a) they sold Ishares so quickly and b) avoided the bailout. They seem pretty fleet of foot and look like a winner in what will admittedly clearly be a less profitable industry going forward...

Barclays shares have had a good run this year - they're now trading at 330p, against a 52 week low of just 51p - but the last month has seen them fall back.

While the yield at 1% isn't great, at least this is a bank that is yielding something, and without the government looking over its shoulder to make sure shareholders don't benefit from any improvement in profitability. Yield should grow rapidly as the bank recapitalises and impairment items fall, though it's hard to see Barclays becoming a high yield portfolio candidate in the next couple of years.

What are the comparisons? Well if we want to look at another successful bank, we could compare it to HSBC Hldgs, which has also evaded state ownership, and also has significant international operations. HSBC Hldgs trades at twice book value, and on a prospective PER of 25x, significantly higher valuations than Barclays, though it does offer a 3% yield - again, though, below historic levels, and not enough to qualify it for a high yield portfolio. So Barclays looks like a snip, compared to those multiples.

On the other hand you could look at Lloyds Banking Group - a bank that is losing money, has a very significant government stake, and wll continue to be limited in its dividend payments by the government's desire to see a return on its investment. It's also a bank that made a very bad mistake in taking on the Halifax Bank of Scotland business, which is responsible for a murderous bad debt experience. Since Lloyds Banking Group will be losing money for the next two years, there are no PE multiples, and there are no dividends to mention either. So all we have to go on is the price to book value - which at 2.4x doesn't make it look like a bargain.

I have added some further thoughts on Barclays here: http://www.stockopedia.co.uk/article/view/33246/barclays-striking-out

I'd rather go for HSBC and Standard Chartered myself. For the Asian exposure which is where the future lies (Out East). Or Goldman Sachs. Barclays just doesn't cut it for me but agree it's far better placed than Lloyds or RBS (both of which I've lost money on when I tried to catch the falling knife!)

There was a good Economist article on Barclays this week entitled "The Great Escape"- pretty similar themes to your one, Valueinvestor.

BARCLAYS is the escapologist of British banking. Its quarterly results on November 10th widened the gap still more on its British rivals, RBS and Lloyds Banking Group (LBG). In recent months the bank’s share price has also outperformed that of HSBC, which is the soundest of the four (see chart).

It raised the question of a breakup which I didn't realise was even on the table. They may well be imagining it..

Does Barclays, in its present form, have a sustainable business model? A hint that it might not was implied in some management changes earlier this month: commercial and retail banking were split so that Barclays’ retail banking is now a distinct global unit. Commercial lending, Barclays Capital (the investment bank) and wealth management have been brought together into one unit. Although Barclays still favours a universal banking model, this move would make it easier to ring-fence the retail bank and its insured depositors. That may be a response to some regulators’ calls for banks to make “living wills”, which spell out how they would wind down their business in a crisis, and suggestions that the retail and investment-banking arms of complex financial groups should be separated.

http://www.economist.com/world/britain/displaystory.cfm?story_id=14856318

It raised the question of a breakup which I didn't realise was even on the table.

Of course, Barclays is already in the process of selling one major unit: http://www.dailymail.co.uk/money/article-1226024/Profits-Barclays-hit-record-11bn.html

But full-year profits will also be boosted by the sale of fund manager Barclays Global Investors to US finance house BlackRock, which was approved by shareholders in August and which is expected to reap a windfall profit of about £5 billion.

Hadn't come across this thread until it was "reactivated" today. It is most intersting, from a historical perspective, to see how wrong some of the calls late last year/early this year for Barclays imminent demise were (and concern in April that 100p was too high a share price!). I do know that a number of better informed posters were far more confident about Barclays and HSBC than about RBS & Lloyds/HBOS (thiough there certainly was justifiable fear of systemic collapse in the wake of Lehman's). Those posters were certainly proved correct.

Regards,

Mark

In reply to Betasurfer (post #24)

The question about how acceptable "universal banking" will be as a business model going forward is a very important one indeed for Barclays! .....probably more so than any other bank in the world, at this point, since they have determinedly navigated their way through the crisis in a way that has actually enhanced their competitive position versus other banks using the universal banking model.

Most of the stronger banks, post-crisis, also operate well on the universal model (thinking JPMorgan, HSBC etc) but they would probably suffer less than Barclays if they were forced to separate retail banking from commercial/investment banking (largely because their retail banking footprints are more robust and larger).

I am not surprised at all that Barclays has weathered the crisis better than most (being on record as having expected it! ;-)). However, I am surprised by the extent of the outperformance of the shares (even though that may now have run its course?).......and I think that the short-term risks are now weighted to the downside, given the potential for government interference to screw up management's carefully-laid plans!

There are still far too many votes in the idea of governments interfering in the banking system. It is therefore odds on that they will be unable to resist doing so - and will thereby make things worse [hence another reason for  my expectation of a very slow recovery - and one fraught with risk, given that the market seems to have discounted an increasingly-rosy outlook!!].

ee