June 1, 2017

Rand equity

by Breakingviews.

Barclays is facing an unfamiliar issue: it may soon have more capital than it needs. The UK lender on Thursday said it was selling most of its remaining stake in its South African subsidiary for 2.2 billion pounds ($2.9 billion). After a year of retrenchment, Chief Executive Jes Staley can start thinking about how to reward patient shareholders.

Strong demand from hedge funds and institutions prompted Barclays to scale up the placing of its stake in Barclays Africa Group Ltd to 34 percent from 22 percent. The sale effectively reduces the bank’s shareholding below 15 percent – the level at which it no longer has to include BAGL’s assets on its balance sheet for regulatory purposes. That should add 73 basis points to Barclays’ common equity Tier 1 capital ratio, lifting it comfortably above 13 percent.The disposal ticks an important box in Staley’s plan to shrink and simplify the lender. Since he laid out his strategy in March last year, Barclays’ workforce has shrunk by more than a third, while its market capitalisation has increased by a quarter, to $46 billion. The expected closure of its non-core unit by the end of June – six months ahead of schedule – is a further step towards concentrating on retail, commercial and investment banking in Britain and the United States.Barclays faces unfinished business, even aside from uncertainties around Brexit and the U.S. economy under President Donald Trump. It is fighting a lawsuit from the U.S. Department of Justice over mis-selling of mortgage-backed bonds. British investigators will soon decide whether to charge the bank and former executives over Barclays’ crisis-era fundraising from Qatar.

Nevertheless, the ongoing business is in reasonable shape. Its core operations generated an 11 percent return on tangible equity in the first quarter. Barring any further setbacks, its capital ratio will continue to improve.

One option is to buy back $2.7 billion of preference shares, which pay an eye-watering coupon of more than 8 percent. This would knock about 25 basis points off Barclays’ capital ratio, Investec analysts reckon, but save it around 200 million pounds a year. Another is to bump up the dividend, which Staley cut when setting out his strategy. For once, Barclays has a pleasant kind of conundrum.

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