Buy Barclays Plc (BARC) - Target Price 425p
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
T: +44 (0) 1872 262620
F: +44 (0) 1872 265326
E: mail@galvan.co.uk
W: www.galvan.co.uk
S P E C I A L R E P O R T
Buy Barclays Plc (BARC)
Target Price 425p
Are things hotting up at Barclays?
Barclays has defied the critics and emerged as a core US operations and its flagship building in
potential winner from the financial crisis. As rival Manhattan.
banks are left licking their wounds, Barclays is busy
So in short, rather than paying $88 billion for third-
building its empire. Forget back to basics, for
tier ABN Amro, Barclays scooped up the best bits of
Barclays it’s more a case of back to bonuses.
top-tier Lehman Brothers for $1.75 billion. The deal
has been truly transformational.
Coming to America
No one can say Barclays lacks ambition or luck for And to the victor, the spoils
that matter. Barclays had a near death experience
Investment banking is one industry that has
when they bid for ABN Amro near the peak of the
undergone a once in a lifetime shake-out in recent
market in 2007. Luckily RBS stepped in and saved
times. Names that have been around since the turn
Barclays from financial ruin. Today RBS is 70%
of the last century have disappeared. Wall Street
owned by the UK government (rising to 84% soon),
has lost three of its five biggest names as Bear
while Barclays has kept its commercial
Stearns, Lehman Brothers and Merrill Lynch have
independence.
collapsed or been snapped up at fire sale prices.
Having escaped disaster in 2007, Barclays In Europe, a similar shake out has taken place. Of
turned its attention to Lehman Brothers in the European players, only really Credit Suisse can
late 2008. claim to have strengthened their market position.
Most big European banks have retreated or exited
Lehman Brothers were on the brink of collapse and altogether from investment banking.
the US government were desperate to find a buyer.
Barclays expressed strong interest but the deal was An industry shake-out tends to strengthen
blocked by UK regulators due to Barclays’ desire to those who remain. The survivors emerge
place most of Lehman’s problem assets in a from the ashes to find a less crowded
separate structure. Once again it was a blessing in marketplace.
disguise. As we know, Lehman’s then filed for
bankruptcy. This allowed Barclays to negotiate a
much better and cleaner deal, acquiring Lehman’s
Galvan Research and Trading, CMA House, Newham Road, Truro, Cornwall, TR1 2SU
Risk Warning Notice: Galvan Research And Trading Ltd is authorised and regulated by the Financial Services
Authority (FSA). Whilst every attempt is made to ensure the accuracy of the information provided, no
responsibility can be accepted for any inaccuracy. The information provided cannot be relied upon as
constituting a recommendation, nor construed as any offer to sell, or any solicitation of any offer to buy
investments. No liability is accepted for any loss whether direct or indirect, incidental or consequential, arising
out of any of the information being untrue and / or inaccurate, except to the extent caused by the wilful default Winner: Best Equity Derivatives
or gross negligence of Galvan Research And Trading, its employees, or which arises under the Financial Services Advisor, Best CFD Advisor
And Markets Act 2000.T: +44 (0) 1872 262620
F: +44 (0) 1872 265326
E: mail@galvan.co.uk
W: www.galvan.co.uk
S P E C I A L R E P O R T
Buy Barclays Plc (BARC)
Barclays estimate that the top five global
All quiet on the domestic front
investment banks (Goldman Sachs, JP Morgan,
Deutsche Bank, Credit Suisse and BarCap) had 41% At the moment, it appears as though Barclays is
market share of all capital market revenues in the firing on only one engine. It’s estimated that BarCap
first quarter of this year compared to 25% three could contribute up to 60% of profits in the short
years ago. term. CEO, John Varley, is keen to let us know that
this isn’t the plan for the longer term and he is
As of today, BarCap has managed to become top aiming for "two-thirds of the group's profit" to come
three in areas such as interest rates, fixed income, from retail and commercial banking and Barclays
foreign exchange and commodities, but some pieces Wealth. Until then, Barclays has more in common
have been missing from the puzzle – prime with Goldman Sachs than its UK retail rivals like
brokerage, equities and M&A (mergers and Lloyds and RBS.
acquisitions). The Lehman’s acquisition has helped
plug BarCap’s missing pieces, particularly in On the domestic front, Barclays may not be in great
equities. While BarCap can now offer the full range shape now but it has an opportunity to steal a
of investment banking services, it is now eager to march on its UK rivals right now.
push become top tier in all categories. The best way Barclays is free to lend where they see fit as they
to do that is to hire while its competitor’s fire. are not participating in the government’s Asset
BarCap has also gone on a massive hiring spree Protection Scheme. Lloyds and RBS have taken their
poaching top talent with fat salaries and cash eye off the ball as they sort through the mess in
bonuses. 2,000 people have joined BarCap since the their existing loan books. Profit margins have
beginning of the year to build up its prime significantly widened this year for both mortgages
brokerage, equities and M&A advisory businesses. and corporate lending. As Barclays is not anywhere
Barclays plans to hire an additional 1,000 staff in near as burdened in these areas as RBS or Lloyds,
the near future. Teams of M&A advisors are being there is a real opportunity to gain significant market
added in the UK, Germany, France, Italy and Japan share. For example, only 18% of Barclays’ loans are
whether there is any work for them to do or not. for UK mortgages and its average loan to value
(LTV) is around 50%, which is a very comfortable
position to be in.
Our view is that BarCap have timed things
right so far and industry league tables
indicate they are winning market share in a Commercial real estate presents an even
less crowded industry. bigger opportunity as Barclays’ loan book is
only around a fifth of the size of Lloyds and
RBS.
Galvan Research and Trading, CMA House, Newham Road, Truro, Cornwall, TR1 2SU
Risk Warning Notice: Galvan Research And Trading Ltd is authorised and regulated by the Financial Services
Authority (FSA). Whilst every attempt is made to ensure the accuracy of the information provided, no
responsibility can be accepted for any inaccuracy. The information provided cannot be relied upon as
constituting a recommendation, nor construed as any offer to sell, or any solicitation of any offer to buy
investments. No liability is accepted for any loss whether direct or indirect, incidental or consequential, arising
out of any of the information being untrue and / or inaccurate, except to the extent caused by the wilful default Winner: Best Equity Derivatives
or gross negligence of Galvan Research And Trading, its employees, or which arises under the Financial Services Advisor, Best CFD Advisor
And Markets Act 2000.T: +44 (0) 1872 262620
F: +44 (0) 1872 265326
E: mail@galvan.co.uk
W: www.galvan.co.uk
S P E C I A L R E P O R T
Buy Barclays Plc (BARC)
Hidden dangers It’s been estimated that if Barclays valued
The Barclays bank sheet is still the subject of great their structured credit derivatives using the
debate. Some clear progress has been made on two same methods as RBS it could result in an
fronts this year. Firstly, the sale of Barclays Global additional £3 billion in losses.
Investors (BGI) has increased the tier 1 capital ratio
to 8.8% from 5.6% at the end of last year. That’s Barclays has always argued that it’s an apples and
still lower than Lloyds, RBS and HSBC, but it doesn’t oranges comparison, implying their assets are better
stand out like a sore thumb anymore. It should also quality. The benefit of taking your medicine early is
be noted that Barclays has not had the scale of that you bounce back quicker. We believe Barclays
impairments that the other UK banks have suffered, will keep reporting impairments well into next year.
so a lower capital ratio for Barclays could be
Perhaps an even more concerning issue than the
justified.
balance sheet is the rise in trading risk. The daily
The second area of improvement is that the balance average value at risk (VaR), a way of measuring the
sheet is shrinking. The value of its assets has trading risk, was 40% higher in the first half of 2009
declined from more than £2 trillion to £1.5 trillion in than during the second half of last year. Welcome
just six months. This is partly because sterling has onboard Lehman’s. Daily VAR was almost double
recovered but also a deliberate decision by the bank the level in the first half of 2008. So what does all
to reduce its exposure to complex derivative deals. this mean? It means Barclays are taking on a lot
greater trading risk than before, which is helping to
However there are still some hidden dangers
drive profits at BarCap. That’s all dandy when you’re
lurking. It’s long been suspected that Barclays are
in strong markets, but when things turn sour we will
drip feeding losses to the market. This may be
found out how well the risk is being managed.
happening for two reasons.
Barclays may face greater balance sheet risk going
Firstly Barclays has yet to report an overall loss. Its forward and investors may perceive it as a riskier
no co-incidence that the banks that have reported and less reliable business.
big losses have then sacked their top brass.
Barclays haven’t reported an overall loss and their The world is your oyster
management team have kept hold of their jobs. Barclays has a more international business mix than
The second reason to believe Barclays are softening RBS and Lloyds. Lloyds is effectively a UK retail and
the landing is that their “marks” or prices used on commercial bank. RBS is retreating from its global
more exotic assets are questionable. Other banks ambitions and focusing instead on UK and US retail
like RBS and Lloyds have marked down their assets and commercial banking. Barclays has a far broader
far more than Barclays. base of operations including Barclaycard, BarCap,
Galvan Research and Trading, CMA House, Newham Road, Truro, Cornwall, TR1 2SU
Risk Warning Notice: Galvan Research And Trading Ltd is authorised and regulated by the Financial Services
Authority (FSA). Whilst every attempt is made to ensure the accuracy of the information provided, no
responsibility can be accepted for any inaccuracy. The information provided cannot be relied upon as
constituting a recommendation, nor construed as any offer to sell, or any solicitation of any offer to buy
investments. No liability is accepted for any loss whether direct or indirect, incidental or consequential, arising
out of any of the information being untrue and / or inaccurate, except to the extent caused by the wilful default Winner: Best Equity Derivatives
or gross negligence of Galvan Research And Trading, its employees, or which arises under the Financial Services Advisor, Best CFD Advisor
And Markets Act 2000.T: +44 (0) 1872 262620
F: +44 (0) 1872 265326
E: mail@galvan.co.uk
W: www.galvan.co.uk
S P E C I A L R E P O R T
Buy Barclays Plc (BARC)
Banco Zaragozano of Spain, a majority stake in credit risk will allow big banks to offer lower deposit
Absa of South Africa and a stake in BlackRock of the rates and attract cheaper funding. The result is a
US. Cosy Club of big banks taking commercial
advantage of their special status. With this in mind,
This diversity has benefited Barclays in 2009 as the
we believe Barclays may even benefit from a
banks with big capital markets divisions (like
tougher regulatory regime.
BarCap) have helped offset weak UK retail and
commercial operations.
The final say
With Barclays’ capital ratio almost 9%, balance
Although most economies face challenges
sheet fears are subsiding. Another round of fund
at present, Barclays’ diversification both
raising looks unlikely. Barclays also passed the FSA’s
geographically and operationally, should
stress test, adding further credibility to its capital
lower its overall risk profile.
position.
The markets attention is shifting away from net
Cosy club asset value to earnings potential. Valuations based
There has been a big political drive, both here and on earnings potential will be far higher than those
abroad, to reform the banking industry and subject based on liquidation of assets. In light of significant
it to stricter rules and greater scrutiny. progress made at BarCap this year, both in terms of
market share and recruitment, we have made an
The most likely targets for regulatory reform upward revision to our sum-of-parts valuation
are the major retail and investment banks model.
considered “too big to fail”.
We currently value Barclays at 425p a
While the big banks may face more draconian rules share.
going forward, it may actually strengthen their
competitive position due to the Law of Unintended
Consequences. If a bank is deemed “too big to fail”,
it means it is guaranteed by the state. This means
that customers who deposit money and institutions
that help fund banks will consider that their money
is safer with a big bank than other banks and
financial institutions. That is a perfectly logical
conclusion. The whole financial system operates on
trust or its fancier name - credit risk. Having lower
Galvan Research and Trading, CMA House, Newham Road, Truro, Cornwall, TR1 2SU
Risk Warning Notice: Galvan Research And Trading Ltd is authorised and regulated by the Financial Services
Authority (FSA). Whilst every attempt is made to ensure the accuracy of the information provided, no
responsibility can be accepted for any inaccuracy. The information provided cannot be relied upon as
constituting a recommendation, nor construed as any offer to sell, or any solicitation of any offer to buy
investments. No liability is accepted for any loss whether direct or indirect, incidental or consequential, arising
out of any of the information being untrue and / or inaccurate, except to the extent caused by the wilful default Winner: Best Equity Derivatives
or gross negligence of Galvan Research And Trading, its employees, or which arises under the Financial Services Advisor, Best CFD Advisor
And Markets Act 2000.T: +44 (0) 1872 262620
F: +44 (0) 1872 265326
E: mail@galvan.co.uk
W: www.galvan.co.uk
S P E C I A L R E P O R T
Buy Barclays Plc (BARC)
While evidence of green shoots builds daily, the
rolling recession is still crashing its way through
the loan books of UK banks, including Barclays.
The road to recovery will be littered with
potholes.
Strengths Weaknesses
• Good spread of business • Balance sheet uncertainty
• Stable management team • Lower capital ratio than other UK banks
• Powerhouse in investment banking • Losses from conventional loan book
• Has avoided government capital • yet to peak
• Opportunities from BlackRock deal • Less stable earnings going forward
Galvan Research and Trading, CMA House, Newham Road, Truro, Cornwall, TR1 2SU
Risk Warning Notice: Galvan Research And Trading Ltd is authorised and regulated by the Financial Services
Authority (FSA). Whilst every attempt is made to ensure the accuracy of the information provided, no
responsibility can be accepted for any inaccuracy. The information provided cannot be relied upon as
constituting a recommendation, nor construed as any offer to sell, or any solicitation of any offer to buy
investments. No liability is accepted for any loss whether direct or indirect, incidental or consequential, arising
out of any of the information being untrue and / or inaccurate, except to the extent caused by the wilful default Winner: Best Equity Derivatives
or gross negligence of Galvan Research And Trading, its employees, or which arises under the Financial Services Advisor, Best CFD Advisor
And Markets Act 2000.You can also read
