Barclays, Venkat and the ghost of Edward Bramson

Last week there was a flurry of big job news at Barclays. Britain’s last remaining universal bank with a proper transatlantic presence brought in a couple of heavyweight board members and appointed a new duo to lead the investment banking division.

It would be unfair to call this deckchair-moving on the Titanic — Barclays is not in the kind of existential crisis that it and many others faced in 2008. But the scale of changes does feel piffling compared with the bank’s woeful stock market performance versus its peers.

That is true however you define Barclays’ peer group. Its valuation — on the basis of share price to book value — is lower than the UK’s other big four banks. NatWest, the former RBS group that is still 48 per cent owned by the government after its 2008 bailout, is trading on a valuation nearly double Barclays’ 48 per cent of book. And Barclays is rated way below equivalent US banks. The best of the Wall Street bunch, Morgan Stanley, is trading above 175 per cent of book.

There are at least five reasons why Barclays is out of favour. 

First, investors in Europe no longer appreciate the old universal banking model. One reason for Natwest’s resurgent popularity is that, like Lloyds, it now focuses largely on its retail and commercial operations, after shrinking the investment banking unit that all but killed it 15 years ago to virtually nothing. With the jump in interest rates boosting lending margins and next to no downside yet from rising defaults, pure-play operators like these are far more on trend than the more diversified Barclays.

Second, one of Barclays’ jewels, its giant credit card business, is seen as a potential vulnerability amid an impending UK recession. As analysts at Berenberg point out, the credit card operation has in the past accounted for 70 per cent of the bank’s loan losses, even if it has been derisked.

Third, despite record fixed-income trading boosting the investment bank last year, critics say Barclays has failed to reinvent its business model to suit the post-2008 regulatory landscape. This penalises investment banking with heavy capital charges and advantages capital-light asset and wealth management.

In a mirror image of Morgan Stanley’s evolution away from a dominant investment bank towards a valuable wealth management franchise, Barclays’ investment bank has become more weighty. A thriving asset management business, Barclays Global Investors, was sold to BlackRock. And the former Barclays Wealth operation has been undermined by a retrenchment from Asia, the Middle East and the US, as well as by the regulatory ringfence which has split UK and non-UK operations.

Fourth, the investor distaste for the universal bank model, and especially for the investment banking element of it, is heightened at Barclays by an accident-prone record. The latest gaffe involved it having sold nearly $18bn of securities without regulatory permission — for which it agreed last autumn to pay $361mn.

This has all translated into a vicious circle, whereby stable long-term active investors are thin on the shareholder register, with index funds and hedge funds dominating. Although activist Edward Bramson failed in his effort to shrink the investment bank, his ghost haunts investor sentiment.

Fifth, chief executive CS Venkatakrishnan has been laid low by a recent cancer diagnosis, with treatment set to last at least another couple of months. Although he is still working remotely from his home in New York, he is unable to tour the world and present his investment case face to face.

There is some cause for optimism. Once he is back on the road, “Venkat” as he is known is determined to step up the case that nagging investor scepticism about Barclays’ investment bank is misguided: he has spent months amassing data proving that the perceived or expected volatility in the unit’s quarterly performance is disproved by actual results. The bank is also keen to repair its fractured wealth business by asking UK regulators for the go-ahead to reintegrate the unit outside the more secure ringfenced part of the group.

Although Venkat will not shrink the investment bank, he hopes to reduce its relative importance to about half of profits from the current two-thirds tally by making retail banking more efficient and expanding its US cards and payments units as well as the wealth franchise. Even if much of this doesn’t materialise, says Berenberg, Barclays — on five times projected 2024 earnings, a 25 per cent discount to European rivals — is just extremely cheap.


Business Asia
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