Barclays’ New Strategy Issues £5.8 Billion Worth of New Shares
Barclays Bank, Britain’s third largest financial institution, plans to issue £5.8 billion worth of new stock shares in an attempt to look up after its £12.8 billion capital shortfall, generated by new regulatory demands.
The new financial strategy comes in accordance with the new capital requirements issued by Bank of England’s PRA, the Prudential Regulation Authority, whose target is to prevent institutions from investment losses in the event of a financial crisis.
The new requirements imply a minimum leverage ratio of 3%, which has reportedly led Barclays to a capital shortfall of £12.8 billion. According to the Bank of England, the PRA viewed Barclays’ new capital plan as an opportunity to meet the leverage ratio of 3% by June 2014, without cutting back on lending to the British economy.
Despite common belief, Barlays’ new strategy will not significantly affect the amount of lending offered to independent businesses and households. According to chief executive Antony Jenkins, granting fewer transactions to big enterprises and social providers would only reduce their risks of facing financial difficulties in the future, thus helping them maintain their forefront position in the market.
The planned sale will give existing investors the opportunity to acquire new shares in order to prevent a possible downfall of their position. The measure is, therefore, considered to be beneficial to both Barclays and its loyal customers.
The bank claims that once they have managed to close their capital gap, they would largely increase the amount of earnings paid in dividends to shareholders to 40% and 50%, with their original target estimated at only 30%. As a measure to protect the rights issue of its customers, Barclays will offer every shareholder an additional share for every four he owns.
As part of its new strategy, Barclays will also issue £2 billion worth of bonds, a set of legal documents given to someone who invests money in a government or company, with the commitment of paying the amount back with an added interest. The bank plans to use the bonds as additional shares or wipe them out completely in the unfortunate event of the institution facing bankruptcy.
In order to meet the £12.8 billion target set by the PRA, Barclays intends to sell an additional £80 billion worth of assets and raise another £2 billion through the issue of their loss-absorbing securities, by retaining more of their earnings.
Recently, it has been revealed that the bank lost an additional £2 billion from mis-selling payment protection insurance, with their total for mis-selling going up to £5.5 billion.
Barclays is currently Britain’s third largest bank and one of the most trusted financial institutions, therefore the decision of the PRA to have them comply to a set of requirements in order to revive their capital resources came as a slight surprise.