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Barclays' sell-down of Africa unit to ease balance sheet pressure

News that Barclays Plc has won regulatory approval from the South African finance minister to sell off a further 22% stake in Barclays Africa Group Ltd. was well-received by analysts, who said the deal will go some way toward shoring up the bank's capital ratio.

Barclays confirmed the afternoon of May 31 that it would go ahead with the sale, which amounts to 187 million shares, confirming an earlier report by Sky News. South Africa's Public Investment Corp., the continent's largest pension fund, will take up 59 million of the shares on offer, equivalent to a roughly 7% stake.

Barclays Africa closed down 4.76% in May 31 trading at 139 South African rand per share, a price at which the stake being offered would be valued at 25.99 billion rand, or about £1.54 billion. The sale would take Barclays' remaining stake in the unit to roughly 28%.

Barclays CEO Jes Staley announced in 2016 that he intended to exit the African business to sharpen the bank's focus on higher-growth segments, and the bank reduced its stake from 62% to 50.1% in May of that year. However, the exit process for the remainder of the business has involved a lengthy process of negotiation with regulators in South Africa, where Barclays Africa is listed.

Efforts to sell the stake were temporarily derailed by a surprise reshuffle of the South African cabinet by President Jacob Zuma in March, which included the sacking of Finance Minister Pravin Gordhan.

"The whole process and timeline for the disposal of the stake was put back," Robert Sage, a U.K. bank analyst with Natixis, said in an interview.

But news that the sale process is now back on track is welcome news for Barclays investors after "a poor first quarter, relative to expectations," he added.

"If they sell this 22% stake in one go, it would be very, very positive for Barclays. This is a stock where the narrative has been quite negative for some time for a whole host of reasons. This does appear to be a little piece of good news," he said.

Barclays saw net profit slump to £190 million in the first quarter, down from £433 million for the same period in 2016. Staley also faced a grilling from shareholders at the bank's recent annual general meeting for having attempted to unmask a whistleblower, a transgression that resulted in a pay cut and an investigation from the regulator.

Barclays intends to reduce its stake in Barclays Africa to below 20%, which would allow for the deconsolidation of the business. As it stands, Barclays must calculate its capital ratios as though it has full ownership of Barclays Africa, but can book only the share of profit equivalent to its stake.

Barclays noted in announcing the sale that it expects its common equity Tier 1 ratio to be boosted by roughly 75 basis points once it gets below the 20% threshold, something Sage would be welcome given where the bank stands relative to peers.

"There are very few major banks in Europe where there is still a significant question mark over capital adequacy. UniCredit SpA and Deutsche Bank AG have had to do rights issues, whereas I don't think a rights issue is a central case for Barclays," he said. "But Barclays is one of those stocks that people are just a little bit concerned about. They really need to get CET1 to around 13% if they are going to restore confidence. Royal Bank of Scotland Group Plc is there already."

The 22% stake sale would boost Barclays' CET1 ratio by about 20 basis points, according to Edward Firth, head of European banks research at Macquarie Group.

"Overall, it's good news. It will help with the CET1 ratio," he said in an interview, although he added that the deconsolidation milestone might not be reached in the immediate future.

"I'd have thought Barclays would have to wait another 12 months. You can't just keep flogging this stock into the market," he said.

Joe Dickerson, managing director at Jefferies International and a frequent commentator on U.K. banks, agreed that the sale of the stake would be a helpful move.

"It's incrementally positive," he said in an interview, adding that Barclays would still need to get its stake below the 20% threshold to see a meaningful difference to its CET1 ratio.