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Barclays investors crave simpler bank as CEO Venkat prepares revamp

2024.02.09 01:12

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© Reuters. Traders work on the buying and selling flooring of Barclays Bank at Canary Wharf in London, Britain December 7, 2018. REUTERS/Simon Dawson/File Photo

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By Sinead Cruise and Lawrence White

LONDON (Reuters) -Barclays’ CEO C.S. Venkatakrishnan is underneath stress to ship a plan this month to win over stressed shareholders clamouring for a streamlined enterprise mannequin and better, extra sustainable returns for a fraction of the chance.

The British bank has one of many lowest valuations amongst friends, with shares down by round 24% within the final yr, pushed partially by a hefty disposal of inventory by a prime investor, Qatar Holding, on Dec. 4.

It has additionally underperformed UK and eurozone banking indexes, information exhibits.

Eight shareholders who spoke to Reuters — together with 4 among the many prime 20 — favour shrinking its funding bank, offloading stakes in sub-scale companies or exiting non-core property completely, and placing billions again into their pockets.

Barclays’ CEO, recognized as Venkat, has been listening. Speaking on the World Economic Forum at Davos final month, he acknowledged the outsized contribution Barclays’ funding bank had made to group earnings, and pledged to revive steadiness and readability on the make-up of the bank.

But with the worldwide financial system in flux, patrons of companies the bank goals to promote look like operating shy.

The bank’s wrestle to safe backers for its UK cost enterprise, reported by Reuters on Feb 1, dangers complicating Venkat’s goals and shareholder hopes of a swift turnaround.

Barclays, one in every of Britain’s oldest banking manufacturers, lacks focus, based on fund managers who say they’re underwhelmed by its risk-adjusted returns.

“The basic problem is this bank isn’t boring enough for the majority of its investors,” mentioned Sajeer Ahmed, portfolio supervisor at Aegon (NYSE:) Asset Management, which manages Barclays shares.

“It is an investment bank with a retail bank attached. Management has tried to spell out the benefits of diversification but this just isn’t supporting the bottom line right now,” he mentioned.

Many banks streamlined their riskiest actions after the 2008-9 monetary disaster, however Barclays set its sights on rising a top-tier transatlantic funding bank from the embers of Lehman Brothers.

The regulation which adopted the disaster has made earning money from funding banking a lot harder, pushing investors to query whether or not it’s time to cut back these ambitions.

Barclays declined to remark.

The bank, which drafted in Boston Consulting Group to assist with its revival plan, is because of current it on Feb. 20.

HIGH RISKS, UNEVEN RETURNS

The funding bank has lengthy been central to Barclays’ common banking enterprise mannequin, which additionally spans shopper and company lending.

But six shareholders mentioned the group’s depressed valuation mirrored the funding bank’s excessive prices and unpredictable returns.

In 9 months by September, Barclays’ Corporate & Investment Bank reported quarterly revenue ranging between 4 billion and three.1 billion kilos, with quarterly prices of round 2 billion.

Returns on tangible fairness (ROTE), a key profitability measure, ranged between 15.2% and 9.2% throughout these quarters.

The division consumes 63% of group capital reserves, and delivers returns under business friends, UBS analyst Jason Napier mentioned in a Jan. 11 be aware.

By distinction, BNP Paribas (OTC:) commits lower than a 3rd of group capital to its funding bank, whereas UBS has mentioned it is going to allocate not more than 25% of risk-weighted property to its funding banking operations.

Investment banking as an business additionally tends to be accident-prone. In 2022, a U.S. securities gross sales blunder noticed the bank’s litigation and conduct prices that yr surge to 1.6 billion kilos from 400 million kilos the yr earlier than.

“Execution is key,” mentioned Benjamin Toms, analyst at RBC. “This means no mishaps and a conduct and litigation expense that is closer to 100 million pounds rather than a billion.”

INVESTORS LOSE FAITH

Barclays’ ahead value to e-book ratio, a measure of its market valuation relative to property, is at 0.34 — in contrast with 0.34 for Deutsche Bank, 0.56 at BNP Paribas, 0.82 at HSBC and 0.95 at UBS, primarily based on LSEG information on Feb. 8.

Investors mentioned this displays doubts about Barclays’ combine of companies, and a rising consensus {that a} leaner, simpler bank may ship stronger returns.

Barclays has sub-scale companies which may fetch respectable price-tags in the event that they have been offered, 5 of the investors mentioned, declaring that a number of of those models have been unlikely to be greater than quantity three or 4 of their respective markets.

Disposals from Barclays’ Consumer, Cards & Payments (CCP) unit can be welcomed, 4 of the shareholders mentioned, with one suggesting the worldwide bank cards enterprise utilized a “complexity discount” to the bank’s general valuation.

Reuters earlier reported the bank’s wider research of its world funds actions.

Capital unlocked by asset gross sales may help a extra beneficiant dividend or buyback programme or be reinvested in fee-earning companies like wealth administration, three investors mentioned.

“In my opinion the only way the shares re-rate is a meaningful reduction in the size of the corporate and investment bank, and re-focus of the business on forecastable franchise based revenue streams,” mentioned Ed Firth, analyst at KBW.

Jefferies analysts count on Barclays to suggest a pointy rise in capital redistribution, rising to round 7 billion kilos by end-2025, to assist increase flagging shares.

There are indicators short-sellers are retreating forward of any potential transfer. Barclays has not featured within the prime 10 of EMEA’s most closely shorted large-cap banks since October, analysis from information agency Hazeltree confirmed.

Investors who spoke to Reuters count on the bank to improve its annual 10% ROTE goal to between 11% and 13%. In 2023, U.S. bank JP Morgan achieved 21%.

“I think people are struggling to believe that higher returns are deliverable and sustainable,” mentioned Ben Ritchie, head of developed market equities at Abrdn.

“But once companies get the credit for consistent delivery, it is a game-changer,” he mentioned.

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