Varley's and Diamond's views

As reported in Telegraph of 29 June 08:

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/06/29/cnbarc129.xml

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/29/ccprof129.xml&page=1

Extracts:

Without extra funds, Citi estimates that Barclays will have a tier-one capital ratio of 5.8 per cent at the end of 2008, which would be the "ninth worst [of 66 banks] in Europe". However, Mr Varley, interviewed with Barclays president and investment banking head Bob Diamond, responded:
"Bob and I hear people talking in the market, talking as though there is some eternal truth about an equity ratio of 6 per cent or 6.5 per cent.
"As an organisation, you have to form a point of view about how much capital you need to run your business.
"You have to be prudent in that and you have to be analytical in that. You have to determine that number and that's what you've got to have. You don't want to have a penny more than that because if you have surplus capital you dilute your returns."

Mr Varley said: "The environment is in itself humbling. This has been a very significant market dislocation. The question is how do you handle that? How do you manage the risk? How do you cope with the difficulties the environment throws up? If you analyse Barclays through that relative light, Barclays has coped well with that environment."

"...I don't think we've been behaving like a constrained [by capital inadequacy] bank.
I don't see constraint in the hiring that Bob's been doing in his businesses. I don't see it in the acquisition of a bank in Russia, I don't see it in the acquisition of a credit card business in the UK and I don't see it in the opening of 600 branches outside the UK in the first five months of this year.
We're not behaving like a bank that's hunkered down and uncertain about the future. We're very clear about what we should be doing."

Diamond believes a particular opportunity is the US. "We've been cautious in the US," he says, "because most foreign banks have not succeeded when they've entered the US market. It's bigger, yes, but it's far more competitive.
"However, we entered 2008 with six or seven of the key players in the US domestic capital markets pulling back.
"It's counter-trend to be investing in the US but we see an opportunity to move into the top three or top five in all the areas that are important to us and we're already seeing progress."
Indeed, in the first half of 2008, Diamond says Barclays will be in the US top three for agency residential mortgages, when it has previously never even been in the top 10.
"We're not going to do everything in the US all at once but we do have a plan that will take us two to three years and will be a significant investment," he says.
"The conventional wisdom is that you can grow organically in some businesses but not in retail and commercial banking. We are defying that."

Will the £4.5bn be enough? "Yes, I mean, of course," replies Varley. "We have thought carefully about what resources we need. You don't want to have a penny more than that because if you have surplus capital you dilute your returns. We have been thoughtful and I hope that if you look at Barclays over the years, you can see a pattern of thoughtfulness"

£4.5bn fund raising

http://www.offer.barclays.com/index_main.php?task=view&section=press&language=en&cnt=bb&med=asx&type=video

Barclays share issue web site that has press release, presentation and webcast.

http://uk.reuters.com/article/businessNews/idUKL2563723720080625?feedType=nl&feedName=ukdailyinvestor
Citywire

"About half the capital will be directed at higher (capital) ratios and about half will be directed at new business opportunities," said Barclays Chief Executive John Varley.

The fundraising would have increased its core tier 1 capital ratio to 6.3 percent at the end of last year, from the 5.1 percent it reported.
That ratio will stay above its target of 5.25 percent for "the foreseeable future" but will come down from 6.3 percent as cash is used for growth, possibly on acquisitions, Varley told reporters on a conference call.

intends to keep paying dividends in cash and the annual payout would be in line with last year's 34p per share until the dividend is more than twice covered by earnings.

SMFG will get a 2 percent stake and a co-operation agreement will give it access to Barclays Capital's investment bank platform and its India and Pakistan footprint, while Barclays will be able to access a wider Japanese and Asian network for areas such as private banking.

Varley said he wouldn't rule out acquisitions, but is mainly focused on taking advantage of higher margins and problems the credit crunch has created among rivals.
Bob Diamond, head of investment bank Barclays Capital, said there was "a terrific opportunity" to grab market share on Wall Street as "six or seven" big U.S. banks have stepped back during the market turmoil.
Barclays has opened over 600 branches outside Britain this year and bought a bank in Russia and a UK credit card business, and Varley said it is taking "a substantially higher" share of UK mortgage lending.

Diamond said the bank had better-quality assets, was managing risk better than rivals, and had avoided getting involved in many of the leveraged finance deals that had caused others to take big writedowns

http://www.marketwatch.com/news/story/barclays-executives-strike-defiant-tone/story.aspx?guid=%7B2A99E6E5-A29A-4898-8064-9C5E6EA3B8FE%7D&dist=msr_1
Wall Street Journal

Varley said the U.K. lender wasn't a "slave to volumes." He pointed to the British residential mortgage business, noting Barclays has been able to gain market share at much better margins even though the market has contracted sharply as both house prices and mortgage approvals tumble.
The acquisition of Goldfish, a credit-card company that has changed hands several times, is another example of Barclays' willingness to strike deals in a tougher environment, he said

Diamond ... also defended charges it hasn't been as aggressive as rivals it marking down assets.
"Our marks shouldn't be an issue," he said, using the group's leveraged finance business as an example.
"I said last July that we weren't uncomfortable with our risk, I talked about Alltel in the U.S. and (Alliance) Boots in the U.K.," he said.
"We were offered to be the lead manager on Clear Channel, we were offered to be the lead manager on EMI, and we said no thank you to those deals. I could go through two or three other deals (that Barclays turned down,)" Diamond said.
Diamond also dismissed worries about the impact from recent credit rating downgrades of bond insurers on securities that Barclays holds, saying the lender uses its own models when it feels external ratings agencies are too optimistic.

http://www.theherald.co.uk/business/news/display.var.2364456.0.Barclays_boosted_by_4_5bn_injection.php The Herald

Panmure Gordon analyst Sandy Chen is particularly worried about its exposure to monoline insurers, which stood at £2.8bn at the end of the first quarter of 2008. Monolines guarantee debt repayments and Chen reckons these could suffer from rising loan defaults.
He said: "Amidst the hurly- burly of other banks' write-downs and capital raisings, the pace and organisation of (Barclays') £4.5bn share issue are impressive. Stepping back, though, it seems to us that little has changed in the deteriorating fundamental outlook (particularly with monoline write-downs)."

http://www.thesun.co.uk/sol/homepage/news/money/city/article244711.ece
Sun
[Varley] said: “We want to make sure we have the full tool kit available to us.”
This is likely to include opening more branches overseas — where Barclays has opened 600 so far this year and is aiming for a further 300.
But Bob Diamond, head of the bank’s investment banking arm Barclays Capital, said expansion could include taking out rivals on Wall Street — where there are some “terrific opportunities”.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/26/cnbarc126.xml
Telegraph

Shareholders also applauded Barclays' pledge to preserve the dividend at last year's level and pay it in cash - in contrast to HBOS, RBS and Bradford & Bingley

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/26/ccbarc126.xml
Telegraph

"There is no difference in how the sponsoring banks, Credit Suisse and JP Morgan Cazenove, would conduct due-diligence and how underwriters might. Why would they take any risk at all with their reputation? Believe me, they shook the tree," Mr Varley insisted, adding: "What motivation do we have in raising capital today and not disclosing?" [John Varley]

While Barclays' clever fundraising was widely lauded for avoiding the dreaded rights issue process, the bank's accompanying disclosure fell short of rivals HBOS and Royal Bank of Scotland.

The suspicion remains that official underwriters would have demanded fuller disclosure than Qatari and Japanese investors with strategic intentions

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/06/26/cxquest126.xml

Telegraph - Questor

Forget price/earnings ratios, tangible book value, return on equity, or any other valuation measure - any company whose board stresses that the dividend is safe "in the absence of unforeseen circumstances" when yielding 10pc has to be cheap. So long as you trust the management.
At Barclays, it all seems to come down to management. Chief executive John Varley and his colleagues have staked their careers on the bank's performance.

given the level of due diligence likely to have been undertaken by the Qataris and others before they signed up, it is a reasonable assumption that there isn't anything likely to prove fatal out there.

http://www.ft.com/cms/s/0/74844fcc-4319-11dd-81d0-0000779fd2ac.html?nclick_check=1

FT

Unlike some of its rivals, Barclays has taken the decision to hold loans on its books in such a way that they do not have to be revalued to prevailing market prices. Bob Diamond, Barclays' president, yesterday pointed out that the bank had been proved right in not marking down the value of its debt in the buyout of Alltel, the US telecom group. Alltel was recently sold to Verizon, the rival US telecom group, and Barclays expects the debt to be repaid in full.

Standard & Poor's yesterday acknowledged that Barclays' approach - while legitimate - gave cause for concern. "Significant uncertainties remain about the ultimate value of structured credit and leveraged finance positions," the agency wrote as it confirmed a negative outlook on Barclays' credit rating. "Indeed, in our opinion, Barclays' markdowns would likely have been materially greater had it applied fair-value accounting to certain of these exposures in line with many peers."
Barclays' upbeat outlook may yet be proved right - and investors yesterday gave them the benefit of the doubt. But if sceptics' concerns on Barclays' balance sheet come true, the consequences for Mr Varley and Mr Diamond would be dire.

Barclays bouncing back?

According to The Scrutineer in The Scotsman, Barclays is bouncing back:
http://thescotsman.scotsman.com/business/The-Scrutineer-Barclays-bouncing-back.4190478.jp

Extracts:

Its plan to possibly go the placing route, probably via sovereign wealth funds, rather than a pure rights issue, looks pleasingly cat-footed on the hot tin roof that is the banking sector.

...any new shares issued by Barclays are very unlikely to be at the deep discounts of other banks. Royal Bank of Scotland's discount was 35 per cent, HBOS's was 45 per cent, and Bradford & Bingley's was 48 per cent. Most banking analysts believe if Barclays went to the sovereign funds they would get away with a discount of 10 per cent at worst, and perhaps even be able to issue stock at a small premium to the market price.

The likely clawback mechanism for existing Barclays' shareholders to get a slice of any new issue action also neatly sidesteps the opprobrium B&B attracted through bringing in its new shareholder, Texas Pacific, without such a pre-emptive offer for shareholders.

And such a placing with blue-chip funds (possibly including existing Barclays' shareholders, China Development Bank and Temasek) should lead to less of the "shorting" of shares that have bedeviled other recent cash calls and driven the market share prices lower.

Barclays said profits in its global retail and commercial banking divisions had shown strong growth in May compared with May 2007. Profits in investment banking and investment management were in line with a year before, it said. In other words it looks virtually certain no further nasty stuff from the provisions woodshed is likely to scar Barclays' interim results six weeks or so hence.

Barclays may have boxed itself into a corner?

The bank has been relentlessly upbeat about the hit it has taken from the credit crisis. Wrongly so, argues the City. Philip Aldrick and Katherine Griffiths report in The Telegraph:http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/...

Extracts:

The main problem has been scepticism about the hits Barclays has taken on its "toxic" treasury assets, such as sub-prime mortgages and collateralised debt obligations. But Diamond and Varley have not helped matters with limited disclosures on sub-prime related writedowns. Analysts are in no doubt that Barclays is being more optimistic than peers. Had Barclays marked all its assets as conservatively as RBS, it would be nursing an additional £8bn of writedowns, according to Citigroup.

Bankers do stress that a bald read-across can be misleading, with Varley himself saying: "Risk management at the different banks is not generic, so you would not expect the marks to be generic." And analysts do accept that Barclays' risk management has been better than most. But the bank's excessive confidence is not convincing anyone. Should one monoline insurer or any of Barclays' leveraged loan debts default, it would lead to heavy additional writedowns.

Any underwriter will demand thorough due diligence, particularly on the "toxic" treasury assets, with even the typically more relaxed sovereign wealth funds recently turning ultra-cautious. Due diligence threatens to expose Barclays' writedowns to greater scrutiny and will almost certainly lead to more provisions. Cynics say Varley and Diamond are loathe to take the decision because the U-turn could put their jobs on the line.

Varley likes to maintain he has options, unlike RBS and HBOS, but, though Barclays' problems may not be as severe, the pressure for a capital raising is just as great. Now that the others have addressed the issue, Barclays is the only major lender left in the spotlight.

Given that Seegers is desperate to do a deal for a bank in these cut-price markets, Varley's pressures are perhaps even greater than those at rival banks. The coming months will be his toughest test yet.