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September 2009 | ifr special report | 5 UK UK bank equity prices


apace and early next year we will be able to execute deals almost anywhere in Europe.” It has completed the recruitment of the bank’s most senior managers. September saw the arrival of Sam Dean, whom BarCap poached from Deutsche Bank to become head of European ECM and co-head of European global finance with Richard Boath, reporting to Wieseneck. Jim Renwick has also arrived from UBS to run UK ECM, while Matthew Ponsonby and Mark Warham, formerly of Citigroup and Morgan Stanley, have started work running European M&A. Rivals pointed out that BarCap has an immediate advantage because it can use its lending power with clients to win ECM and M&A mandates. While Wieseneck agreed the universal model is a distinct advantage, he is preparing to fight for market share. “We will have to prove to our clients that we can execute in ECM and M&A,” he said. “Clients will not use us just because we ask for their business. Rather, we have to earn their trust.” Barclays Capital is building out is business at the bottom of the market, but missed out on a bumper pay-day that rivals like RBS enjoyed from the record levels of equity issuance in Europe this year. “If you look at the world as a short-term opportunity then we have missed the recent flood of equity issuance in Europe,” said Wieseneck. “But we are making decisions beyond that and are aiming to provide the full suite of products across the next cycle.” BarCaps’s ability to lure talent from rivals that accepted taxpayer bailouts was possible because of its stubborn refusal to take government money. Barclays President Bob Diamond expressed frustration earlier in the year about its constant need to defended itself over its capital position. After both RBS and Lloyds fell into partial state ownership, analysts were convinced Barclays would follow. When its share price nearly went into meltdown at the start of 2009, threatening to destabilise the bank amid fragile confidence in the barely functioning funding markets, BarCap came out fighting. In an unprecedented move, chairman Marcus Agius and chief executive John Varley published an open letter to shareholders, reassuring them that results for 2008 would be brought forward and show strong revenues. The bank absorbed £8bn in gross credit impairments and still turn a pre-tax profit. More recently, it nearly had to seek insurance under the UK government’s asset protection scheme, a backdoor into


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Oct Dec Source: Thomson Reuters Datastream


partial nationalisation. It avoided this when it sold the iShares division of Barclays Global Investors, showing its ability to raise more capital. Not only did it enable the bank to avoid the APS, but it enabled it to continue its hiring spree. Sources at the bank said Renwick had been considering a move for months but delayed signing up until Barclays had avoided participating in the APS. While questions still remain over bad assets, the scepticism has given way to acceptance by rivals that the bank is a winner from the crisis. Its recent results prove that Barclays Capital remains a strong growth engine.


In the first half, profits at Barclays Capital doubled to £1bn, accounting for 35% of overall group profits. Much of the bank’s success was down to higher customer volumes in areas like interest rates and currencies, and capital markets activity such as underwriting bond sales, said Diamond. But as the investment bank bounced back from a weak 2008, bread-and- butter lending to retail and commercial customers was hit by rising impairments on corporate and consumer loans. The biggest challenge facing Barclays’ management in the months ahead is not supporting an un- derperforming investment bank but how to break its reliance on Barclays Capital.


Still looking inwards


Lloyds’ capital markets business is relatively small and the bank has adopted a more cautious stance in investment banking, avoiding an extensive build-out. However, the forced takeover of HBOS has started to change that, while also handing the combined group a big restructuring and divestment challenge.


Lloyds acquired HBOS at the height of the financial crisis. Within weeks it needed a


£17bn bailout, resulting in the UK government taking a 43% stake in its shares. Before making the acquisition, Lloyds was among the few banks to carry a Triple A credit rating. It had been lauded for focusing on traditional lending and deposits, while its peers loaded up on risky assets. During the first half of the year, LBG recognised losses of £1.4bn on debt securities and available for sale investments, compared to £203m for the second half of 2008. HBOS legacy assets accounted for around 80% of the first half write down. The corporate markets business, which includes its commercial real estate and specialist finance units, among others, reported a loss of £7.73bn from corporate impairments due to the deteriorating economic environment. The asset finance unit, which provides leasing and speciality finance, reported a loss of £250m – again from impairment charges. However, total income from Lloyds’ wholesale banking division, which is being restructured following the HBOS acquisition, was up 37% to £4.65bn in the first six months. This was driven by the market dislocation, low interest rates, good transaction volumes on the capital markets and robust client demand for derivatives at higher spreads, the bank said. LBG submitted a restructuring plan for Lloyds to the European Commission on July 15 and the EC has indicated that a condition of approving the state aid received by Lloyds could be the disposal of some of its operations. The bank has pre- empted the findings of this report and is understood to have put controlling stakes in both the equity and debt of HBOS’s integrated finance unit on the block, in an effort to accelerate the divestment exercise. The division is likely to be valued at just below £4bn. LBG declined to comment.


Feb 08


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