Barclays’ ‘opaque’ pension plan deals draw regulatory scrutiny

Bloomberg

UK regulators have warned banks against carrying out complex pension plan deals that are structured to delay any hit to capital reserves, a broadside that analysts say could affect Barclays Plc.
The Prudential Regulation Authority (PRA) said in a statement that lenders should avoid entering into agreements that defer the impact of pension scheme contributions as they could breach its rules and overstate a company’s capital strength.
The regulator said that it “will carefully scrutinise transactions,” including any that would allow firms to avoid regulatory capital deductions, describing the trades as “complex, artificial and opaque,” and hinting that existing deals could be reversed. “Where any existing transactions are to be unwound, we will look to agree with firms a reasonable time line to achieve this,” the PRA said.
Barclays is likely to be impacted in relation to 2019 and 2020 contributions totalling 1.25 billion pounds ($1.64 billion), Autonomous analyst Christoper Cant said in a client note. Unpicking the arrangements could bring forward a 30 basis point reduction to the bank’s CET1 ratio, a key measure of capital strength, he calculated.
Analysts at Numis said in a client note that Barclays had recently asked the firm’s UK retirement fund trustee to consider investments in gilt-backed notes “in order to manage the ‘capital impact’ of contributions.” The hit from a 500-million-pound contribution to the pension fund in 2019 was deferred to 2024, while a 750-million-pound one in 2020 was equally spread between 2023 and 2025, Numis said.
Barclays has already garnered plenty of headlines after it said that it expected to take a 450 million-pound expense after mistakenly issuing about $15 billion more structured notes and exchange traded notes than it had registered for sale.
“Barclays might feel a bit hard done by if it is now forced to unpick these transactions,” he said. “Barclays’ scheduled contribution for 2022 was expected to be modest in any case, so a further equivalent transaction would not have added materially to the cumulative capital benefit in their case.”
Numis said it did not believe the situation would affect Barclays’ ability to start a planned 1-billion-pound buyback in the second quarter of 2022. But it “could reduce the bank’s buyback potential in 2023,” the
analysts wrote.

Barclays sees muni
market turnaround
Barclays Plc says the municipal market is due to rebound from a record decline in the first quarter and it’s a good time to start buying.
“At current levels, a lot of bad news has already been priced in, and muni valuations are cheap enough to outperform Treasuries for the remainder of the year,” strategists Mikhail Foux, Clare Pickering and Mayur Patel said in a note. “In our view, current levels present a good entry point to start slowly adding muni exposure.”
State and local debt, which tends to follow the performance of US Treasury securities, has been hit hard by a broader selloff spurred by the Federal Reserve tightening monetary policy to combat inflation. Municipal bonds has posted a 7% loss so far this year, according to Bloomberg indexes.