Barclays may need to raise €9bn, says analyst

"SUBSTANTIAL NEAR-TERM balance sheet concerns" mean Barclays Bank may have to raise up to £7.5 billion (€9.2 billion), according to a British analyst yesterday.

In a research note, Ian Smillie, of RBS, said the same "deeply-ingrained performance-led culture" that helped generate profits of £8.3 billion over the last four years has also led the firm to a higher level of balance-sheet gearing than peers.

This has left the bank with an uncomfortable position in the current environment of financial system de-leveraging and heightened external scrutiny of banks' balance sheets, he added.

Downgrading the bank to "sell", Mr Smillie estimated that the bank was facing another £4.7 billion in write-downs and that it needed up to £7.5 billion in order to bring its capital ratios in line with peers.

Mr Smillie is not the first analyst to raise concerns about the bank in recent times. Three weeks ago, Goldman Sachs estimated that Barclays was facing up to £4.6 billion in credit losses.

Admitting that the environment was likely to remain challenging into 2009, Barclays last month reported a 33 per cent fall in net profit and £2.8 billion in write-downs.

That figure is quite small compared to some of its rivals in the banking world, although many analysts have questioned Barclays' method of recording write-downs.

It has refused to record mark-to-market losses on some £9.2 billion in leveraged loans on the basis that it intends holding the loans to maturity.

Other banks have recorded billion-euro write-downs by slashing the value of such loans to the levels they are currently trading at in the market.

Shares in Barclays were almost 4 per cent lower in early trading yesterday, bringing year-to-date losses for shareholders to 28 per cent.

British banking concerns are not limited to Barclays, however. UBS banking analyst Alastair Ryan this week said British banks may have tapped the Bank of England's emergency liquidity scheme for up to £200 billion, a quadrupling of the £50 billion estimated by Bank of England governor Mervyn King when the fund was unveiled last April.

The special liquidity scheme (SLS) allows cash-strapped banks to ease their funding difficulties by swapping illiquid mortgage-backed securities for government bonds for up to three years.

Globally, central banks have been massive suppliers of liquidity to needy financials. Figures up to July show that the European Central Bank has loaned €458 billion to European banks.

In the US, the Federal Reserve has provided almost $1 trillion (€689 billion) in emergency loans.

The Bank of England this week said that lending between British banks fell by 68 per cent to £205 billion in the year to July. Despite that, it ruled out the possibility of extending the SLS scheme, which is due to be closed in the week of October 20th.

That means British banks will "then have perhaps £200 billion of 'exploding' funding", Mr Ryan said. "Where exactly are the banks going to find £200 billion in term funding within the next three years (before the SLS expires), in addition to that needed to support the maturity of their existing medium- and long-term bonds?"

The UBS analyst said that, with everyone being aware of the funding maturing within three years, banks will feel compelled to refinance well beforehand.

However, credit markets are unlikely to be looking for £200 billion in incremental UK mortgage exposure within the next two years, Mr Ryan said.

Banks would then be forced to cut back lending and sell off assets. Without central bank help, British house prices could fall by 40 per cent, Mr Ryan said. "A permanent solution is needed."