Fears grow over banking rally as Barclays falls

Shares in Barclays (BARC) plunged by another 5% on Wednesday amid fears that the end of the bank rally is nigh following an Abu Dhabi sheikh's decision to cash in a large chunk of his investment.

On Tuesday, the Abu Dhabi state-owned International Petroleum Company (IPIC) announced plans to sell part of its stake in the bank, sending the shares plummeting by more than 14% to the bottom of the FTSE 100 fallers' board.

The sale will net a £1.5 billion profit for IPIC, which is an investment vehicle of the Abu Dhabi royal family, after just seven months.

IPIC announced late yesterday that it plans to exchange the Mandatorily Convertible Notes (MCN) that it bought back in October for £2 billion into 1.305 billion Barclays shares.

The Abu Dhabi Royal family, along with that of Qatar, injected £5.8 billion into Barclays as part of a £7 billion cash call at the end of last year. The investment was made close to the height of the financial crisis that has plunged the world into recession.

The move enabled Barclays to avoid the sort of Government bail-out forced upon Royal Bank of Scotland (RBS) and the Lloyds Banking Group (LLOY) but was deemed controversial with UK shareholders, who felt the deal offered the Middle Eastern investors overly favourable terms and diluted their holdings.

IPIC's MCNs, which are paying a coupon of 9.75%, were due to convert to common stock at the end of this month at 153p a share.

Credit Suisse has placed all 1.3 billion shares at 265p, a 16% discount to the closing price on Monday. Despite some shareholders bailing on the bank, the placing was 1.5 times covered with 220 investors ranging from hedge funds to institutional investors.

IPIC continues to hold £1.5 billion of warrants over a further 7.58 million Barclays shares at a price of 197.8p per share which it has said that it will retain. These are currently registering a notional profit of £570 million.

However, it is mulling plans to sell off £1.25 billion of reserve capital instruments paying an annual interest rate of 14%. These are likely to fetch a good price following the improvement in Barclays's creditworthiness and the slide in global interest rates since the deal was struck.

H.E Khadem Al Qubaisi, managing director of IPIC, said the sale did not signal a break in its relationship with Barclays but was instead part of its strategy to focus on oil and gas.

He said: "IPIC has a high regard for Barclays, and great confidence in its management team and ongoing strategy.

"The Emirate of Abu Dhabi intends to maintain a close commercial and strategic relationship with Barclays in the future. The decision to dispose of some of its interests in Barclays reflects the focus of IPIC's long-term investment strategy on hydrocarbon-related opportunities."

Some believe the sale may fuel fears that other big investors are also poised cash in on their holdings.

In April, another key investor, the Qatar Investment Authority, trimmed its stake from 6.4% to 5.8%.

Meanwhile, analysts at Nomura suggested that Sinagore's Temasek could be looking to trim its stake as incoming boss Charles Goodyear shifts funds to the energy and consumer sectors.