Barclays Shares in Focus on Rights Issue Rumours; Lloyds and RBS Shares on Watch for Half-Year Earnings Reports

<p>Investors will be watching as the three major UK banks – Barclays, Lloyds and RBS – get set to report their half yearly earnings to […]</p>

Investors will be watching as the three major UK banks – Barclays, Lloyds and RBS – get set to report their half yearly earnings to the market.

Key Dates:

  • Barclays H1                                         – 30th July, 7am
  • Lloyds Banking Group H1              – 1st August, 7am
  • Royal Bank of Scotland H1            – 2nd August, 7am

It’s been a very healthy year for the markets. In the last 12 months alone, Barclays, Lloyds and RBS shares have rallied 118%, 179% and 74% respectively. All three stocks have vastly outperformed the benchmark FTSE 100 Index, which is trading 29% higher than this point last year.

So with all major banks set to inform the market on how they performed for the first six months of the year, is this a situation where they have more to lose than to gain? I think so. The risks are therefore to the downside for this earnings season given heightened expectations of strong earnings and the three issues I highlight below.

Three Issues to Watch

There remain three highly sensitive issues that will likely be the key focus for the banks earnings season.

First and foremost, is the speculation regarding a Barclays rights issue correct and how much is the bank seeking to raise?

Secondly, what is the time plan for the government to sell its 39% stake in Lloyds (and to a lesser degree its 81% stake in RBS, given that shares are trading well below a breakeven point).

And thirdly, what increased provisions are all banks likely to take to face escalating costs surrounding PPI and interest rate swap mis-selling claims?

  1. Barclays’ rights issue – Fact or Fiction?

Last week the market was awash with rumours that Barclays could announce a multi-billion pound rights issue when it reports its H1 earnings this Tuesday. This came as a surprise to the market. To give you an indicator about the likely shareholder reaction, Barclays’ shares fell as much as 6.5% to a low of 300p, where it found support and recovered. Rumours of a rights issue continued into the weekend, with the Sunday Times reporting the bank was likely to announce a £4bn rights issue. Other rumours indicate that the figure could be as much as £7bn. That’s a huge rights issue. This morning Barclays’ shares fell 2.8%.

Why does Barclays need to raise cash? The Bank of England’s Prudential Regulatory Authority (PRA) has applied pressure on Barclays to raise its capital buffers after it was highlighted to fall short of the 3% leverage ratio threshold in a report last month (alongside that of Nationwide). The threshold maintains that banks must have £3 in capital for every £100 that it lends. This leaves the bank with close to a £7bn shortfall that needs to be plugged soon thanks to previous Bank of England Governor Sir Mervyn King bringing forward the deadline date for this leverage ratio to be met at the end of this year (a special extension was given to Nationwide to the end of 2015, given the relatively small shortfall it had). They can meet this 3% target in two ways; sell assets or raise capital.

Barclays are also expected to sell contingent convertible bonds or CoCo’s, for which the bank received shareholder approval to do so in April this year. It is expected that the bank will announce a combination of CoCos and a rights issue.

And so it is all down to what deal Barclays strikes with the PRA. Will Barclays be able to negotiate an extension to the deadline? How much will Barclays agree with the PRA to raise via a rights issue? £4bn or £7bn? The answers to these questions are expected to trigger big moves in Barclays’ share prices when trading opens on Tuesday morning.

If the bank announces a larger than expected rights issue, this will likely put pressure on the share price. A weighting of the capital raising more towards CoCos is seen as favourable by the market and this, aligned with a rights issue of say £3bn, may be seen as not as bad as expected by shareholders.

Barclays are expected to report profits of £3.7bn for the first half of the year.

Of course, we should not forget too that the Barclays PRA agreement will be amongst the first major signs of the attitude the PRA and new Governor Mark Carney will take with big banks; strict or appeasement. This is a factor that should not be forgotten and will also set a tone for future negotiations.

  1. Lloyds Government Stake Sale

Speculation over the weekend indicated that Lloyds are expected to report a ‘stellar’ set of results on Thursday which would pave the way for the government to organise a flash sale of all or part of its 39% stake in the bank.

The bank could be set to report a profit of £2bn compared to a £439mn loss in the year prior for the same reporting period. This position of strength is expected to give the government freedom to place its shares on the market to institutional investors.

There is also an expectation that Lloyds will use this report to bring back a sense of earnings normality to the bank and its shareholders, with the potential to restart dividend payments – a factor that would be welcomed by its loyal shareholders. This could in fact be used as a welcome caveat to the government’s stake sale plans to reward shareholder faith throughout government ownership.

  1. Greater Loss Provisions

The market is expecting to hear more details surround additional provisions banks will take for miss selling PPR, insurance swaps and other claims. It will be interesting to see if banks such as Barclays take even greater provisions, having already set aside close to £3.5bn for claims.

And don’t forget, we are still awaiting details on who will be the successor to outgoing RBS CEO Stephen Hester. There is a small chance we could find out details as to who will replace Hester.


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