I note a recent article in the newspaper that purports to be America's leading financial journal with the worrisome headline of 'Barclays Mulls U.S. Push as Activist Looms...Executives debate whether greater exposure to the U.S. retail market could both generate revenues and fund its U.S. operations more efficiently'. I have written on Barclays (BARC) before (most recently about three months ago HERE) and noted the opportunistic combination of a company trading below book value, a series of self-inflicted blunders and a serious activist investor as a recent addition to its shareholder base. Suffice to say the above mulling has implications for all three of these elements.
If you get to the nub of why Barclays shares are trading below book value it is all to do with the company not being a serious tier 1 player in either bog standard UK mortgages (step forward Lloyds (LLOY)) or corporate lending (hello RBS (RBS)) or investment banking (a bunch of American names naturally). It has good positions in all these areas but not great ones. In fact the only great franchise you could point to is probably Barclaycard. You can see why activist investors have sniffed around the company because they look at Lloyds – which has recently made a big credit card purchase i.e. making the company look a little bit more like Barclays, and it is trading well above book value.
Of course the big difference still between Lloyds and Barclays is the latter's investment banking unit which - like all investment banking units - is a bit of a feast or famine exercise. On average though, the returns cannot match bog standard mortgage/corporate lending over the cycle - and this is why the activist investor is agitating for a reduction in emphasis to this part of the business. I completely agree. Purchasing some ex-Lehmans assets in the US a decade ago was ballsy but - in reality - it has not really worked. Time to have a long hard look at investment banking and reduce its proportion of the company's mix further...and certainly before the general investment banking markets have another downturn.
What it is certainly not time to do is double up in America by trying to replicate the UK footprint of a retail bank funding lending to corporate clients who in turn tap the group for corporate banking and related advice. Such a model is just about working in the UK where the company has been active for a couple of hundred plus years but it is going to be much harder to get a foothold in the US. Just like a spotty Britpop band trying to break the US of A, top five singles this side of the Pond does not always translate well. So my advice to the American CEO of Barclays - if he does not want more egg on his face - is to chat to the activist and learn how to get your share price back to book value (c. 250p) at least. Caught between a stagnant share price and pressure from investors... I am hoping common sense prevails. Just don't do it!
Filed under: Barclays, Bearcast, Safestyle, Versarien, Be Heard Group, gold, SSE, FTSE 100
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