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Barclays' bounce

Robert Peston | 09:32 UK time, Thursday, 15 November 2007

Credit where it’s due: the performance of Barclays Capital, through the wild storms in credit markets of the past few months, has been incomparably better than that of Citigroup and Merrill Lynch.

Barclays bank signSo as I predicted here, the publication of a trading statement has squeezed the bears: Barclays’ share price has bounced this morning.

This is no small achievement. Barclays Capital was a market leader in reprocessing low-quality US sub-prime loans into the allegedly high-grade bonds of collateralised debt obligations. It was (and is) a specialist in converting muck into brass.

And in the past few weeks there has been an unfortunate collision of economic reality and investment-bankers’ wishful thinking: the price of these bonds has collapsed.

The precise mechanism for this collapse has been the accumulating evidence of the difficulties experienced by US homeowners who had borrowed these sub-prime mortgages – which in turn forced the credit-rating agencies to downgrade the ratings of tens of billions of dollars of securities manufactured from these mortgages.

So if you happened to have a load of these securities on your balance sheet, you were not happy.

How has Barclays avoided the calamitous losses of a Merrill or a Citi?

Well it appears to have hedged and reduced exposure at just the right moments: viz just before the onset of the August credit crunch and again just before the tsunami broke over collateralised debt obligations in October.

Luck or judgement? That matters to shareholders in the long term in respect of how they value this business. But right now the overwhelming emotion is relief. For Barclays Capital to be on course to make record profits in this dreadful climate is impressive.

But is the £1.3bn of write-downs for the four months to the end of October really as bad is it is going to get for Barclays Capital?

Is there any wishful thinking in its valuation of impaired assets?

Here is its retained exposure:

1) £3.8bn of exposure to “high grade” collateralised debt obligations linked to sub-prime, where the four-month write-downs seem to have been of the order of 16%;
2) £1.2bn of mezzanine exposure linked to sub-prime, where the write-downs have been of the order of 25%;
3) £5.4bn of “whole” sub-prime loans and a trading book of sub-prime loans and CDOs, which seems to have been written down 7%;
4) Minimal exposure to SIVs and SIV-lites of £700m, where the write-down has been 9%.

Could the value of all that stuff fall further? Of course. Do those write-downs capture in a reasonable way the horror of recent market conditions? Probably.

However, if I have some residual anxiety about Barclays it is about its £7.3bn exposure to the private-equity deals carried out at the peak of the market in the spring of this year.

Just to be clear. I am not suggesting that the businesses it lent to – including Alliance Boots and the company created by the merger of AA and Saga – are likely to run into financial difficulties.

But it has taken a write-down of just 2.5% on these loans, which seems to me to understate the fall in the value of this stuff (and the net write-down is de minimis after adding back a staggering £130m of fees linked to these private-equity deals).

And what about all those rumours that Barclays has been – or could become – chronically short of liquidity?

Well it says it has benefited from inflows of deposits and increased credit lines from counterparties.

And its conduits – those vehicles created by almost all banks as a way of making a turn from raising cheap-short term money to fund long-term assets – seem to be in reasonable shape.

It says they are fully-funded by commercial paper. And that even if all that funding disappeared, the drain on its own resources would be £19bn – which sounds a lot, but is not critical for a business with £1200bn of gross assets.

Does this all mean that it’s back to business-as-usual for Barclays?

Absolutely not. The outlook for credit-markets remains volatile and difficult. And prospects for the economies on which it depends are deteriorating.

But Barclays is in better shape to cope with those difficult conditions than many believed.

Comments   Post your comment

  • 1.
  • At 10:59 AM on 15 Nov 2007,
  • Stuart wrote:

Are we not getting carried away, or indeed duped, by this Barclays statement? What they have said is that they have written down £1.3 billion relating to the last 4 months. What about the previous 4 years- you calculate to be approx £7.3 billion dodgy loans still outstanding? By my reckoning Citibank and ML have declared all and worst case scenarios, whereas HSBC and Barclays are drip feeding their losses to us, and so far have only declared a small, but not inconsiderable, value in loss. There's much more hiding under the carpet I'm sure. good blogs good info & well informed.

  • 2.
  • At 01:23 PM on 15 Nov 2007,
  • Neil wrote:

I completely agree with #1. Let's not be surprised if the genius of the investment banks who claim to have dodged a bullet in CDOs is actually in their accounting and legal departments.

If they can 'legitimately' bury losses for another few quarters they can keep the bonus-printing apparatus going a while longer. Top-brass can THEN all resign when auditors/regulators require a restatement at a later date when all the fuss has died down.

  • 3.
  • At 02:05 PM on 15 Nov 2007,
  • Ian in London wrote:

Barclays are pulling the wool over the eyes of their investors and the public.

These right downs are in-substantial, and are purely based on propping up the spot price linked to Jamie Diamond's options.

From tomorrow, banks in the US market will have to mark their level 3 assets to market, and as the market value of many of these investments is probably 40-50 cents in the dollar there is a lot more pain to come.

And when pension funds are forced to sell because of downgrades, there will be liquidity in the market, and then the the mark to market will become even worse.

  • 4.
  • At 02:54 PM on 15 Nov 2007,
  • FR wrote:

LOL. I like your style, Robert. We both know these sneaky barstewards at Barclays (and other banks) are hiding their hideous losses as long as possible - merely delaying the inevitable. And who can blame them? - they must be cakking their bankers breeches. After the initial bounce this morning (which was a little premature for you to call a 'bounce' in my opinion, but we'll forgive you), the share price is sliding downwards once again.

Ahhh...schadenfreude is such a base yet delicious feeling, best served cold like revenge in my view.

Trouble is, we'll all end up paying the price for the city boys extravagences and much envied lifestyles...here's hoping the guillotine makes a return in 2008/9!

  • 5.
  • At 03:46 PM on 15 Nov 2007,
  • jim evans wrote:

Dear Robert

If you look at the trade figure you will see a huge differnce between import and exports, its staggering, and is still growing.

  • 6.
  • At 04:45 PM on 15 Nov 2007,
  • Juan Schehtman wrote:

I broadly agree with Stuart and Ian's comments.
However,the possibility of chronic illiquidity in the wholesale MONEY MARKETS,and its impact on the stability of banks,should attract the immediate attention of the Government.
A return to the BoE of the day-to-day supervision of banks, an more proactive intervention in the WMM-on the commonsense THREADNEEDLE"principle that "a stich in time saves nine" -and a serious upgrade to the LEVEL of DEPOSITS REPAYMENT GUARANTEE are necessary,if not sufficient,measures to be put in place.

  • 7.
  • At 05:06 PM on 15 Nov 2007,
  • Simon Stephenson wrote:

Yes, I'd go along with the earlier posters. I'd want to know what basis each of the banks have valued their troublesome assets for the purposes of these write downs, and whether or not truly independent auditors are prepared to confirm that it is reasonable to conclude that these assets are now stated at fair-value.

Like many, I am unconvinced that we are not about to see a massive downward restatement of paper wealth, not just in the financial sector, as the quantification of present value is shifted from cloud-cuckoo-land back towards reality.

  • 8.
  • At 05:11 PM on 15 Nov 2007,
  • Ian wrote:

People need to very carefully read any bank reports on write downs because it is becoming clear that there is a difference in the way that they are being reported.

Does a bank take a 100% hit now and possibly see its shareprice fall badly or declare a monthly loss like Barclays has?

It is very probable that there is much more to be written down by Barclays but if it can delay this announcement for a few months and then slip it in with something else it may well get away with it.

Let me explain. Bank A buys a series of SIV's or other financial instruments over a period of time with each due to mature or rollover at dates in the future.

Now does Bank A disclose its losses in October on only those agreements that fell due in October and leave the rest as is at par? If so they can disclose we lost £ 100 million in October when the figures behind it are that assets previously valued at £ 300 million have only recovered a total of £ 200 million.

Or does it say we have lost £ 1.5 billion as total SIV assets that were previously valued at £ 4.5 billion are now only worth today £ 3.0 billion?

If you take the latter approach you could write them all off this quarter and if confidence returns to some extent you may be able to revalue them at £ 3.5 billion and post a £ 500 million profit next quarter.

Confused? Well that is they way they want you to be!

Once the bankers don't get their fat bonuses - London as whole will feel the pain. I think more relavent than barcaps losses is that future revenue is down. Finance contributes a disproportionate amount of income to London...Now will be an interesting time to evaluate what a slowing finance sector is going to do to the London and UK economy. Will the UK property market still be able to continue with the inflated property prices?

  • 10.
  • At 12:29 PM on 16 Nov 2007,
  • Chris Nowell wrote:


An interesting piece Robert.

I know you do include in your blog words which, if looked for hard enough and understood well enough, indicate that these are your opinions, not facts. But this seems to be well beyond the comprehension of some of those who have already commented on your article, who quite clearly haven't read the RNS statement and therefore seem content to spin and spin whatever doom-&-gloom message they like.

Before the "I told you so" merchants jump in, let me say that of course there will be further write-downs, at Barclays and elsewhere. That is the nature of commercial-paper banking. & it is in the nature of journalism to ensure that these write-downs always grab the headlines much more than write-backs or strong bau trading.

The facts in the RNS statement are there for all to read if they want to; or they can stick with rumour-mongering and finger-wagging if they so wish.

  • 11.
  • At 04:55 PM on 16 Nov 2007,
  • Keith Atkins wrote:

The credit problem surrounding financial stocks will be with us for many months.
At least the Barclays directors have bought shares in the company, and in relatively large amounts even for execs.

  • 12.
  • At 06:43 PM on 16 Nov 2007,
  • Adrian wrote:

All those of you preaching gloom and doom please continue, I would like to buy some more Barclays share with their lovely dividend.

  • 13.
  • At 10:04 AM on 17 Nov 2007,
  • chris wrote:

As a barclays employee, and long-time watcher of banking on both sides of the pond, i am more than aware that creative spreadsheeting is rife. However, as has been noted, its part-and-parcel with the large scale international bank/trade systems to do so to prevent a wholesale collapse of major markets. I mean, you wouldn't admit all the money u owe if u could avoid it, would you?

Barclays Capital is having a good year (through luck:judgement ratio of equal measure to be sure) and it has dodged a bullet in terms of the sub-primes, but it has also heavily invested in higher rate securities which will sustain through the fallow credit period to come.

  • 14.
  • At 10:10 AM on 17 Nov 2007,
  • chris wrote:

As a barclays employee, and long-time watcher of banking on both sides of the pond, i am more than aware that creative spreadsheeting is rife. However, as has been noted, its part-and-parcel with the large scale international bank/trade systems to do so to prevent a wholesale collapse of major markets. I mean, you wouldn't admit all the money u owe if u could avoid it, would you?

Barclays Capital is having a good year (through luck:judgement ratio of equal measure to be sure) and it has dodged a bullet in terms of the sub-primes, but it has also heavily invested in higher rate securities which will sustain through the fallow credit period to come.

  • 15.
  • At 02:31 PM on 17 Nov 2007,
  • Alan wrote:

Barclaycard visa card are now trying to get back their losses by adding a 2,75% charge on overseas purchases. Result is I will not be using the card anymore. I work abroad so naturally I tend to use the card when I'm not in the UK. I always pay long before due date so I'll just use my Maestro in future and pay 1,25 per transaction. As for use abroad to draw cash why bother. Just take your pounds and change em in the country you visit. In Poland no commission and, you can buy and sell just about any currency legally in Kantors countrywide.

  • 16.
  • At 05:18 PM on 17 Nov 2007,
  • Chris Squire wrote:

What is 'mezzanine exposure', please?

  • 17.
  • At 10:38 PM on 18 Nov 2007,
  • Jeff wrote:

Bob (can I call you Bob - only Robert Baby seems a bit too personal)

I've said it once (King v Sant) and I'll say it again - are you sponsored by / on the payroll at Barclays?

What insider information (ok, ok from Merv) do you have on Alliance and Leicester and when you do report on these rumours will it be ala Barclays (it's all good....) or ala the Rock (infamy, imfamy, they've all got it in for me!)

Going for me second post - hoping this isn't a tad to near to the bone..touching a nerve?

Regards
Jeff

At these prices, Barclays are a licence to print money.

anyroads

  • 19.
  • At 04:01 PM on 19 Nov 2007,
  • missmibs wrote:

WHAT IS OUR DARLING NOT DOING SINCE NORTHERN ROCK CRISIS? Darling has made no move to increase deposit protection from the out-dated and pathetic protection scheme of £35k to an intelligent £100k. if another BANK CRISIS AROSE, the £100k protection would stem such a run. APART FROM A CRISIS OR RUN ON A BANK £100k deposit protection is essential AND STANDARD in other modern banking institutions across the world. UK banks will not increase deposit protection with Gov instruction.

  • 20.
  • At 05:07 PM on 19 Nov 2007,
  • Thomas wrote:

I am an account holder at Barclays bank i was led to believe i had an overdraft facility with them after appling for one. As i was not sent a letter stating my application for this facility was refused i assumed i had one.As i was able to take money out of a cashpoint mashine and was not refused any money this led me to believe i was in my overdraft. after going to the bank today to check my balance in person i was told that they are charging me for being overdrawn and that i havn't got one. i was told to write to you because you were having a debate on barcleys, thank you

>>What is 'mezzanine exposure', please?

'Mezzanine exposure means exposure to debts which are just below prime (ratings AA to BB).

  • 22.
  • At 02:00 AM on 22 Dec 2007,
  • tom wrote:

What challenges does Barclays currently face and how would you suggest it meets them?

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