Impairment Losses in Spain a Drag on Barclays Stock

| About: Barclays PLC (BCS)

Barclays (NYSE:BCS) has had some issues in Spain. In 2010, the company’s annual report cited impairment losses in Spain totaling £898 million ($1.45 billion) of its overall impairment loss of £5672 million – representing a more than 15% share. The impairment of loans in Spain was quoted by the company as the single biggest factor dragging down the year’s earnings figures. But the issues keep popping up, with Barclays being forced to raise €1.3 billion ($1.9 billion) to continue its operations in Spain. [1] The London-based global bank competes with other worldwide banking institutions and financial services group like Citigroup (NYSE:C), The Royal Bank of Scotland Group (NYSE:RBS), Bank of America (NYSE:BAC), UBS (NYSE:UBS) and JPMorgan Chase (NYSE:JPM).

Our price estimate for Barclays stock stands at $18.30, a roughly 10% discount to market price.

The Situation in Spain

Spain is still reeling from a decade-long construction bubble. [2] During that time, the country’s mortgage market was fueled by companies and banks offering loans with tenures of 50 years, and even offering options to defer down-payments for a couple of years. [3]

But the housing bubble burst following the global economic recession of 2008, leaving households with heavy debts loads that are now shrinking with write-offs by banks and other financial institutions. Economists expect more impairments in the coming years. [2]

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Barclays’ Spain Connection

Barclays’ corporate banking division has a significant presence in Spain. The company reported in 2010 that it had significant property and construction exposure in Spain, the reason for the £898 million ($1.45 billion) impairment loss. Loans and advances by Barclays to retail and wholesale customers in Spain were valued at £25.6 billion ($41.3 billion) at the end of 2010.

To add to Barclays’ woes, the Spanish government raised the mandatory core capital ratio to 8% for all banks, in a bid to restore people’s confidence in its financial system. Barclays needs to pump in at least €552 million to meet this new requirement.

How Can the Developments in Spain Affect Barclays’ Stock Value?

Barclays’ had outstanding loans and advances to the tune of $417 billion at the end of 2010, implying that operations in Spain represent 10% of this figure.

We believe the biggest impact of Spain on Barclays’ stock value would be seen if larger impairment losses shrink the company’s banking margins. If our current operating margin estimate of 17.5% for 2011 drops to 15%, for example, it would imply 5% downside to our $18.30 price estimate for Barclays stock, pushing our number down to about $17.6o.


  1. Barclays to inject extra funds into Spanish division, BBC News, April 8 2011
  2. Barclays Pumps EUR1.3 Billion Into Its Spanish Unit, Fox Business, April 8 2011
  3. In Spain mortgage funding is different, EconWeekly, March 2008

Disclosure: No positions