Barclays Bank PLC – BARC
Description: Barclays PLC (Barclays), one of the largest banks in the United Kingdom, is a global financial services provider engaged in retail banking, credit cards, wholesale banking, investment banking, wealth management and investment management services. The company’s operations include overseas offices, subsidiaries and associates. Barclays operates in eight segments: UK Retail and Business Banking (UK RBB), Europe Retail and Business Banking (Europe RBB), Africa Retail and Business Banking (Africa RBB), Barclaycard (one of the larger credit card issuers in the UK), Barclays Investment Bank, Barclays Corporate Banking, Wealth and Investment Management, and Head Office and Other Operations.
Investment case:
Barclays emerged from the 2008 financial crisis as the only UK bank not requiring government support. This is an important competitive advantage compared with its direct competitors (RBS and LLOY). Now that improved business conditions and consumer confidence, not only in the UK but elsewhere, are helping to improve asset quality, Barclays has come out a relative winner, even as the European and US banking markets consolidate.
Barclays is well-established in international retail and business banking, credit cards, and investment banking. This facilitates it focus on the high-profile and highly-rewarding investment banking segment, which it offers to the public through Barclays Capital. This The IB group generated half of Barclay’s profit in 2011 and 2012. At the same time, this group was also responsible for a few lapses. For example, it was involved in the Libor rate-rigging scandal, with compensation costs incurred during certain periods exceeding revenues, not to mention substantial reputational damage. Newly established business rules should bring clarity to the future handling of the group.
Ever stricter capital requirements meant that the bank brought forward a capital shortfall of over GBP 13 billion at the beginning of 2013. This issue was partly addressed by BARC in September 2013 when it issued new shares for an amount of GBP 5.8 billion. It is expected that the remaining capital hole of about GBP 7 billion (as of October 2013) will be eliminated by further deleveraging, retaining earnings, and eventually issuing new convertible debts. Obviously, this process comes at a cost for the stock price and makes the investment somewhat unattractive in the short-term, but it does improve the long-term position of the bank.
Barclays continues to aim for a 10.5% medium-term return on equity, while it has a long-term target range of 11.5% to 12%. This target should be achieved by 2019/2020, dependent on regulatory developments. The bank’s cost of capital is presently at about 12%; with improving economic conditions and strict control of costs, the long term target is within reach.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- The company benefits from good brand recognition,
- BARC’s valuation is below that of the UK market,
- BARC offers above average earnings growth potential (i.e. revenues pick-up as markets recover),
- The investment banking group’s revenues have been stable over the past 3 years, while the main competitors’ revenues declined,
- Asset quality has improved as impaired loans have been declining,
- BARC has unexploited potential in terms of restructuring (e.g. disinvestment or winding down low return businesses such as Europe RBB and Corporate Banking).
Weaknesses:
- The investment banking group restructure will take more time to generate low-risk returns,
- Regulators have forced the bank to hold more capital, which will reduce shareholder returns,
- Client risk aversion may mean that the investment banking group profits never return to historical levels,
- The income/cost ratio is presently 75%. It will be difficult for Barclays to improve the latter as employee compensation makes up the most significant part of the costs and it may fail to retain star bankers if cost saving measures are pushed too far,
- European economic improvements may be short-lived, hence loan losses could increase again,
- The investment banking group may have taken on too much risk to produce stable returns.
Company profile, investment opportunity and asset management integration:
| Metric | Rating |
| Operational risks: | Above average |
| Expected growth: | Average |
| Long term value creation: | Average |
| Positive competitive advantage: | Average |
| Management excellence: | Average |
| Financial strength: | Average |
| Investment orientation: | Group “Best-in-Class”: Banking |
Price ranges:
| Buy: | Only forcustomers |
| Sell | Only forcustomers |
| Stop-loss: | Only forcustomers |
| Fair-value: | Only forcustomers |