It would be hyperbole to suggest that shareholders in Barclays (LSE: BARC) (NYSE: BCS.US) face blood, toil, sweat and tears before they can move forward into broad, sunlit uplands. Churchillian analogies should be saved for greater things.
But looking at the latest results from Barclay’s investment banking rival Deutsche Bank, I get the distinct impression that, as a Barclays shareholder, it could be time to put my tin hat on. Barclays could deliver some ugly results when it reports next month, though the longer-term case for investing in the bank remains sound. Short-term weakness could be a buying opportunity for fans.
FICC-le business
The problem is in the fixed interest, commodities and currency (FICC) business, which includes activities such as bond trading and foreign exchange dealing. It’s an important business for Barclays — contributing half of investment banking income and a fifth of total group income in the first three-quarters of last year. Deutsche Bank just reported a 31% drop in fourth-quarter revenues from the activity. Barclays’ third-quarter FICC revenues were down by 44% year-on-year and some analysts forecast a similar fall in the fourth quarter. Whatever the financial impact, I foresee bad headlines.
The whole sector is suffering, with Goldman Sachs, Citibank and Morgan Stanley reporting large drop-offs in revenues. Caution over the impact of Fed tapering has compounded a pull-back prompted by higher capital requirements and a clamp-down on proprietary trading.
World class
The reverse in FICC business has marred what should be a bull point for Barclays. Picking up the best of Lehman Brother’s assets at the height of the financial crisis, it now has a world-class investment bank in the US and UK. Investment banking is a cyclical industry and the resumption of economic activity should lead to a surge in revenues. With fewer players, it should be more profitable.
That still applies to the non-markets side of investment banking, such as mergers and acquisitions, corporate broking and equity-raising, which Barclays has been growing. Last June it boasted of acquiring 35 corporate broking mandates since entering the business in 2010. According to Dealogic its rankings in M&A and equity capital have ratcheted up from 13th in 2007 to seventh last year.
Value
Getting investment banking right will be crucial to Barclays’ recovery. But it’s just one source of value, alongside its franchises in retail banking (where it’s rationalising loss-making European branches and should gain from UK economic growth), Barclaycard and Africa. Meanwhile costs are being cut through the ‘Transform’ programme.
Trading at a little over tangible book value makes Barclays one of the cheapest banks, with good long-term prospects.