Barclays (LSE: BARC)(NYSE: BCS.US) has taken investors on an incredible ride in the past six years, but one needn’t go that far back to witness slings and arrows.
A quick recap of an exciting journey
Let’s start in early 2012 when the shares climbed nearly 40% between the start of the year and the end of February. Of course, the shares then started to slide weighed down by concerns about then-CEO Bob Diamond’s pay, PPI costs, and the LIBOR scandal.
When all was said and done, the shares fell 40% before bottoming at the end of July and both Diamond and chairman Marcus Agius were out.
With the appointment of Anthony Jenkins — previously head of Barclays’s retail banking operations — as the new CEO and a series of internal and external evaluations focusing on the bank’s strategy and culture, the market expressed its relief by sending the shares up almost 80% by mid-February of this year.
Since then, however, investors have been treated to another roller-coaster, with the end result being an 11% decline.
What’s next?
The share performance since February has mainly reflected investors’ uncertainty over Jenkins’ strategy for the bank as well as what the regulators have in store for the bank. Investors hate uncertainty.
We received a sharp answer to at least part of that second bit when the Prudential Regulation Authority (PRA) announced Barclays needed £12.8 billion in additional capital to meet proposed minimums.
In response, Barclays is going to raise £5.8 billion from existing shareholders. This can be seen as good and bad. Bad because if you were already uncertain about the quality of bank balance sheets, this surprise is painful, and if you’re currently a Barclays shareholder you’ll need to cough up more dough or your stake will be diluted.
Taking the positive view, Barclays has bitten the bullet and addressed regulator’s concerns head-on. While there may be questions that Barclays needs this extra capital, fighting regulators isn’t generally a good approach — and especially for vilified banks these days.
Time to sound the all-clear?
So once the capital raise is completed, can investors expect a smoother ride from Barclays?
Well, the UK economy appears to be picking up, which would be good news for the bank as economic growth usually translates into loan growth.
Of course, sustained growth would likely mean central banks would allow interest rates to rise. Higher rates might stifle growth, but coming off the current historical lows there is likely to be some cushion before this happens. A slightly higher-rate environment would likely benefit Barclays’ interest margin and profits.
And there is still the unsettled case of mis-sold interest rate swaps. Barclays is being sued by Guardian Care Homes for £70 million. Next to the £290 million the bank paid UK and US regulators for the LIBOR case, this isn’t overwhelming, but if Guardian wins then it could open Barclays up to similar suits from thousands of small businesses. Not exactly the type of thing investors want management dealing with.
So I guess the answer would be, no, things aren’t all clear for Barclays and there remains more than a little uncertainty.
You have to pay for certainty
Additionally, considering the impending capital raise I estimate Barclays is only trading at a small discount to book value, not exactly the screaming bargain it once was. Of course, I think it is highly likely we’ll see banks trading well above book value when investors become comfortable with banks again.
When that will occur is anyone’s guess, however. Daring investors could benefit handsomely thanks to two drivers were the multiple to expand as the bank’s profits improved.
Of course, that would require being comfortable with the potentially volatile moves in the share price between now and that still unknown date.
Fortune favours the bold. Do Barclays prospects offer enough upside to tempt your investing daredevil?
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> Nate does not own any share mentioned in this article.
