It all started so well for Antony Jenkins when he was appointed CEO of Barclays (LSE: BARC) (NYSE: BCS.US) in August 2012. Elevated from running the retail and commercial banking division and dubbed ‘Saint Antony’, Mr Jenkins promised to clean up Barclays’ ethics, rein in its investment bank and make Barclays the ‘Go-To’ bank.
It’s all going so badly now, for the time being at least. A curve-ball from the Bank of England’s former Capital Taliban regime forced a rights issue, putting back Barclay’s return-on-equity targets. The investment bank’s performance has suffered from stubbornly high costs and weak markets in its crucial fixed income instruments, currencies and commodities(FICC) business. Mr Jenkins has back-tracked on bonuses, torn between professionally-promiscuous American investment bankers and puritanical Westminster politicians.
Investors have also baulked at the high cost/income ratio of the investment bank. That division is now to be ‘fundamentally overhauled’, just a year after Project Transform supposedly set the strategy for all of Barclays’ businesses. It’s beginning to raise a double-edged question: Is Mr Jenkins up to the job, or is it just impossible to run a US-heavy investment bank within a UK retail bank?
Value created
Speculation about spinning off the investment bank has been around since Mr Jenkins took over. His predecessor pulled off a remarkable coup buying Lehmans’ US business in the aftermath of the financial crash and putting it together with Barclays’ UK arm. Now might be the time to realise the marriage-value created, with a float or sale to a competitor, rather than chipping away at the combined entity.
The Financial Times reports that analysts at research house Autonomous have suggested an alternative — a partial flotation of the retail arm. After all, HSBC was said to be considering a float of its UK retail business. Regulatory changes mean Barclays must separately ring-fence both its US and its investment banking operations anyway.
What unites both sets of proposals is the logic that the sum of the parts is worth more than the whole of Barclays. Autonomous thinks a float would value the retail and corporate arms at £30bn, which is 80% of Barclays’ market cap. With investment banking earning half of the bank’s profits last year, the scope for re-rating is clear. Espirito Santo’s analysts calculate a sum-of-the-parts valuation of 356p against a 240p actual share price.
Patience rewarded?
Barclays’ share price is 15% below tangible book value, a remarkable discount in a recovering economy and with the big risks of the financial sector in the past. The bank has become a value play and, like all value plays, there needs to be a catalyst to realise the value. That might be a change of structure, or it might be a change of management. But one thing value investors need in spades is patience.