David Prosser: Barclays battles to avoid the state's embrace

Outlook Barclays Bank keeps pulling rabbits out of the hat in order to avoid throwing in its lot with the British taxpayer. Last autumn, when everyone assumed it would have to sell a chunk of equity to the state to boost its capital strength, it instead managed to do a deal – albeit a controversial one – with the Middle East. And now the sale of iShares, its exchange-traded fund business, may enable it to avoid participation in the asset protection scheme.

At the very least, selling iShares would give Barclays sufficient cash to pay the premium for any toxic assets it would like the taxpayer to insure. Royal Bank of Scotland and Lloyds Banking Group, by contrast, had to offer up more equity to cover the cost of their insurance.

Barclays continues to insist that, unlike RBS and Lloyds, it has some choice about whether to participate in the APS. If it doesn't like the terms on offer from the Treasury, the bank insists it will walk away.

What's more likely, however, is that Barclays will end up insuring at least some assets, but not more than it can afford to ringfence without offering up any equity. The question now is whether the sale of iShares is the best way of achieving the goal of maintaining independence while still insuring enough assets to make joining the APS worthwhile.

The short answer is that if Barclays really can get £5bn for iShares, as some have speculated, it should sign on the bottom line as soon as possible. In these challenging times, that's a heady price for a business understood to have made somewhere between £200m and £250m last year.

At a lower price, the deal becomes less compelling. As analysts at Panmure Gordon point out, iShares makes a bigger contribution to Barclays than it might first seem. They reckon it accounts for around half of Barclays Global Investors' profits. BGI, in turn, contributed about 10 per cent of the whole Barclays group profit last year, but crucially only required 1 per cent of risk-weighted assets. In other words, iShares is much more capital efficient than many other parts of the bank.

Its sale might raise Barclays' tier one ratio above 7 per cent – within spitting distance of HSBC – but that benefit might prove both illusory and short-term.

With a 31 March deadline for applications to the APS, Barclays needs to make its mind up quickly. That won't help its negotiating position as the talks over iShares continue, but the bank pointed out yesterday that it is by no means a forced seller, especially as it has made a strong start to 2009.

Part of that strong start is thanks to its purchase of Lehman Brothers assets, which are now making a big contribution to the group. In that sense, Barclays owes a debt of gratitude to the former US Treasury Secretary Hank Paulson, who handed the bank these assets when he decided to let Lehman go under.

Indeed, Mr Paulson has done a lot for Barclays. He also secured a rescue deal for AIG, with the insurer handing over almost $8bn of American taxpayers' cash to Barclays in the last four months of 2008 alone, in payment for credit default swap contracts. That will have helped with the strong start, too.