Broker snap: Barclays under a Basel III cloud

Nomura Securities has reiterated its neutral stance on banking giant Barclays , arguing that the potential for a re-rating remains limited while the bank faces regulatory pressures in the form of the Basel III guidelines for capital and banking regulations.By Nomura's reckoning Barclays Capital, the investment arm of Barclays, contributes around half of the group's normalised profits, but the proposed regulatory changes will lift the division's risk weighted assets to a little under two-thirds of the group total. "Higher capital requirements would reduce the effective RoE [return on equity] implied by our current normalised PBT [profit before tax] assumption at BarCap to 7% and limit group RoE to 10%," Nomura analyst Robert Law projects. Law sees Barclays' core Tier 1 (CT1) ratio being around 8.5% at the end of 2012. Though this is within the new Basel III guidelines Law notes it would be the lowest CT1 ratio among the UK banks, leaving the door open to pressure from the regulators to strengthen it further in view of the group's slightly racy business mix. Bob Diamond, due to assume the mantle of chief executive officer at the bank, has, however, indicated the group does not intend to raise equity from shareholders, the broker observes.Though bullish on the sector as a whole, Nomura is agnostic when it comes to Barclays."There is a case that the group needs a major repositioning to improve BarCap returns and change the group shape. Although strategically desirable, this could prove dilutive in the short term. That said, the shares do have valuation attractions at 0.92x our estimate of year-end tangible book value - among the lowest of the large European banks but in line with global peers such as Deutsche, Goldman Sachs and Morgan Stanley," Law concludes.