Bank selling £3.8bn stake in US fund management group as it tries to boost shareholder returns and meet new banking rules

Barclays has announced plans to sell its 20% stake in fund management group BlackRock, currently worth £3.8bn, as it tries to bolster its return to shareholders and improve its financial strength.

International rules, known as Basel III, setting out how much capital banks must hold to support their businesses, penalise banks for holding stakes in other financial firms. Selling the stake will mean Barclays will not have to hold the extra capital that the rules require to support the BlackRock stake, which it owns as a result of the sale of its Barclays Global Investors arm in 2009 to the US-based fund management operation.

The sale of BGI, which generated 15% of Barclays profits in 2008, helped the bank bolster its financial strength. Barclays talked then about an “ongoing relationship” with BlackRock which was to be “highly productive”.

But the relationship only lasted three years when Barclays was released from “lock ins”. The bank was originally unable to sell off the stake, while in the second year it needed BlackRock’s consent to sell off half the stake.

Barclays has already admitted to losses on its stake because of falls in its share price. Last year, the bank wrote down the value of the stake by £1.7bn to £3.4bn although a subsequent rise in the share price now values it at £3.8bn. Even so, at around $170 each, the BlackRock shares are still less than the $227 they were worth when the deal was completed three years ago.

Barclays said that the £400m rise in the value of the stake since it had taken the impairment charge could not be counted towards its core tier one capital ratio, the key measure of its financial strength.

Under the Basel III rules, which are being implemented by 2019, keeping the £4bn stake would require Barclays to hold around £10bn in capital.

While all banks are under pressure from regulators to bolster their capital in the face the eurozone crisis, some are also trying to bolster their returns to shareholders. In the case of Barclays, its chief executive, Bob Diamond, is sticking by a target for a 13% return on equity – a key measure of financial performance – but in 2011 achieved just over 6%.

The sale will take place through an offering on the stock market and be handled by Barclays Capital, Morgan Stanley and Bank of America Merrill Lynch while BlackRock will buy back around $1bn of the shares. The amount Barclays raises from the sale will be known in a few days when the share offering is completed. Barclays will be hoping that it brings in more than the £3.4bn that the stake is valued at in the bank’s books.

BlackRock is also one of the largest shareholders in Barclays with a 7% stake.

When Barclays sold BGI in June 2009, BlackRock handed the bank a 20% stake and £4bn in cash. Diamond currently has a seat on the BlackRock board which he will no longer have the right to hold once the sale is completed.