Sure, it's possible to
imagine better news – say £7.3bn in cash from a straight sale instead
of a mix of cash and a 20% stake in the enlarged US find manager. But
this deal would address the UK bank's biggest problem: a perceived lack
of capital.
At first blush, selling all of Barclays Global
Investors might look like overkill. Barclays has already agreed to sell
iShares, the exchange-traded arm that contributes around a quarter of
BGI profits, to private equity house CVC. That deal would increase its
core Tier 1 ratio, the standard indicator of capital strength, from
6.7% to 7.3%.
A sale of the entire fund management division
for cash would bring Barclays' core Tier 1 up to 8.4%. But the 20%
equity stake in BlackRock would probably cut the pure uplift to £4.2bn,
taking the ratio to 7.7%. Given that the asset manager is likely to
contribute more than last year's 10% of pre-tax profits in 2009, some
investors might wonder if it's worth it.
It is. While Barclays
should generate a healthy profit this year, it lacks the safety net
that rivals Royal Bank of Scotland and Lloyds Banking Group have
through their participation in the UK government's asset insurance
scheme.
Investors cannot relax. If their bank makes the same
£8.7bn pre-provision operating profit as last year in 2009, that would
not be enough to absorb a likely £10bn bad debt charge. Barclays could
end up further eroding its capital base compared to RBS and Lloyds,
which both sport core Tier 1 ratios above 9%.
Barclays also
looks over-leveraged on a more basic yardstick, equity to total assets.
Its £1 trillion of total assets is 35 times its £29.4bn stock of core
equity, according to Nomura. RBS, Lloyds and HSBC are only 20, 23 and
26 times leveraged respectively.
Under the circumstances, more
capital is better than less. If capital strengthening is the main
motive, Barclays needs to sell something that will fetch a high price.
Offloading an asset manager with a low carrying value and a high price
tag – £7.3bn represents a stiff 11x forward pre-tax profits – fits the
bill.
