Barclays (LSE: BARC) (NYSE: BCS.US) is unloved by the market. The bank’s troubles are legion, and the shares are down 16% since the start of the year.
Barclays’ substantial investment banking division is undergoing a major restructuring, and past misdemeanours continue to haunt the group. Just when you think all the skeletons are out of the closet, up pops another.
Analysts at Nomura recently estimated that outstanding legal actions over allegations of past misconduct could cost Barclays as much as £7 billion over the next few years.
However, the grimmer things are, the greater the potential rise in the shares when sentiment changes.
All about capital
The determination of governments to guard against a repeat of the financial crisis of 2008/9 has been the driver of most of the decisions and actions banks have taken over the last five years. Specifically, requirements for banks to hold much higher levels of capital to guard against future shocks has been an all-consuming focus in bank boardrooms.
Barclays avoided a government bail-out by the skin of its teeth during the financial meltdown. While Lloyds and Royal Bank of Scotland were saved by the taxpayer, Barclays secured almost £12bn of funding from Middle East investors. (Some dodgy dealings behind that funding could yet see former Barclays executives prosecuted by the Serious Fraud Office; a decision is imminent.)
But still Barclays’ balance sheet has remained under the cosh. Last year, the company had to ask shareholders to stump up £5.8bn in a rights issue in order to help plug a £12.8bn capital shortfall to meet Bank of England loss-buffer rules.
Furthermore, Barclays — along with other banks — is currently being stress-tested by UK and European regulators. If Barclays fails these tests, it could be forced to get the begging bowl out again.
Stress
Barclays’ shares are currently trading at 229p, which is an 18% discount to the bank’s last reported tangible net asset value. Even Royal Bank of Scotland is more highly rated on this measure, at a discount of just 6%.
It suggests to me that the market is concerned about Barclays’ balance sheet, and that the risk of a further fundraising is being priced in.
I think there’s potential for a good uplift in the shares, if it turns out Barclays has satisfied the regulators when the upcoming results of the stress tests are revealed. Investors who have been ‘stressed’ about Barclays could start to feel more relaxed about buying shares.