Barclays shares fall 6 after 5 8bn Rights Issue

Barclays shares fell more than 6% on Tuesday as shareholders reacted to a bigger than expected £5.8bn rights issue and a deeper than forecast £2bn set aside for losses against claims for PPI and interest rate swap mis-selling.

Barclays had of course been expected to announce a cash call to shareholders as it seeks to plug a hole of as much as £7bn in its capital buffers to meet new and speed through leverage ratio thresholds by the Prudential Regulatory Authority (PRA). Speculation varied from a cash call of £4bn to as much as £7bn, with the market settling on a median rights issue of £5bn. As such, today’s announcement, which enables shareholders to buy 1 share for every 4 that they own at a discounted price of 185p, is bigger than expected. Barclays will also convert £2bn worth of bonds into equity.

The UK bank also set aside an additional £1.35bn to compensate for claims of mis-selling PPI, meaning PPI claims have now cost the bank £4bn. An extra £65mn was set aside for claims of mis-selling interest rate swaps as a form of hedging insurance.

Barclays reported an adjusted profit before tax of £3.59bn, which marks a deeper than expected fall in profits of 17%, which had been expected to come in at £3.7bn.

The half yearly earnings from Barclays dampens sentiment for the broader banking sector ahead of earnings from Lloyds (Thursday) and RBS (Friday), whose shares have slumped as a result today by between 1.5% and 2.5%. There are now heightened expectations that both will report additional provisions for mis-selling claims.

What today’s cash call from Barclays does show is the vigour at which the PRA has shown to get UK banks’ finances in order. Having permitted an extension to Nationwide to the end of 2015 to meet the 3% leverage threshold, their stance with Barclays in forcing it to raise cash now shows the strong hand with which it will deal with the largest UK banks that pose the biggest risk.

Such was the activity in Barclays shares after the rights issue news that it took more than 5 minutes to find a weighted price at the market open. Shares opened lower by as much as 6% to a low of 292p, its lowest level since early July.