Barclays Trading Cheaper Than Peers Fuels Breakup Talk

Tuesday, 14 Aug 2012 11:10 AM

 

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Barclays Plc, the U.K. bank fined a record amount for rigging global interest rates, is languishing at a cheaper valuation than 93 percent of its global competitors, fueling a debate about breaking up Britain’s second-biggest lender.

The shares trade at a 59 percent discount to book value, implying investors don’t agree that the bank’s holdings are worth as much as the London-based company says. That’s a lower price-to-book ratio than 141 financial firms listed in the 152-company Bloomberg World Banks Index, according to data compiled by Bloomberg. While Liberum Capital Ltd. says one hurdle to a breakup may be the investment bank’s ability to fund itself, Canaccord Financial Inc. says splitting up Barclays may almost double its market value of 22 billion pounds ($35 billion).

David Walker, the former Bank of England executive director named chairman of Barclays last week, is joining the company as lawmakers reignite calls to separate consumer and investment banking operations after the resignation of its top three leaders. Barclays has dropped 29 percent from this year’s stock peak in March as the firm was fined 290 million pounds for manipulating the benchmark London interbank offered rate.

“The Libor scandal has fueled the debate about breaking up banks,” John Smith, a Manchester, England-based senior fund manager at Brown Shipley & Co., which manages more than 2 billion pounds including Barclays shares, said in a telephone interview. “A breakup would boost the value of Barclays. The retail business is being weighed down by concerns about the investment bank. Still, implementing the split is easier said than done.”

Universal Bank

The break-up discussion will be one of the first issues facing Walker, who will succeed Marcus Agius as chairman of Barclays on Nov. 1. Walker said in an interview with the Telegraph newspaper that “my view is that this should continue to be a universal bank,” according to the Aug. 11 article. Agius has also defended the so-called universal banking model, which combines consumer lending with corporate and investment banking.

Giles Croot, a spokesman for Barclays, said the bank declined to comment beyond Walker’s statement to the Telegraph.

U.S. and European regulators are probing more than a dozen banks worldwide regarding allegations they manipulated Libor, the benchmark interest rate for more than $500 trillion of securities and loans worldwide. Investigators are examining whether traders colluded to rig the rate for profit and whether banks hid their borrowing costs to appear healthier than they were. Barclays was the first to settle.

‘Unlock Value’

Barclays has seen its market value slump more than a third from the end of 2000 even as its book value of equity has surged fourfold, data compiled by Bloomberg show.

The bank’s shares are down 76 percent since peaking at 769.36 pence in February 2007, six months before the start of the credit crisis. The next year, Barclays agreed to buy the North American operations of bankrupt Lehman Brothers Holdings Inc.

Barclays is now trading at 0.41 times its book value, or the value of its assets minus liabilities, compared with the median of 1.24 times for the 152 financial firms in the Bloomberg World Banks Index, data compiled by Bloomberg show. In July, Barclays’s price-to-book ratio hit a 10-month low of 0.34.

“Shareholders should examine the case for a breakup because it would unlock value,” Gareth Hunt, an analyst at Canaccord, who recommends buying the shares, said in a telephone interview. “Management change and the Libor scandal will serve as a catalyst to review strategy. Something has to happen. It can’t be business as usual.”

Breakup Value

Barclays may be valued at as much as 343 pence per share on a sum-of-the-parts basis, or about 42 billion pounds, according to a July 19 report by Hunt and Arun Melmane, London-based analysts at Canaccord. That would be 87 percent higher than yesterday’s closing stock price of 183.05 pence. Among the pieces, the break-up scenario would value the U.K. retail bank at 90 pence a share, Barclays’s credit-card unit at 73 pence and the investment bank at 176 pence, according to Canaccord.

Monday’s market capitalization of 22.4 billion pounds implies the investment bank, known until March as Barclays Capital, has a market value of zero or a negative amount, according to Canaccord’s Hunt and Ian Gordon, a London-based analyst at Investec Plc, even though it accounted for about half of the company’s total pretax profit from continuing operations last year.

Political Pressure

Christopher Wheeler, a London-based analyst at Mediobanca SpA, estimates that Barclays’s retail and investment banking divisions would be worth a combined 33.3 billion pounds in a breakup. That would be 49 percent more than the firm’s current market value. He said in an e-mail yesterday that his analysis is based on tangible book value and comparisons to European retail banking operations and to Goldman Sachs Group Inc. and Morgan Stanley for investment banking.

Barclays trades at 0.48 times tangible book value, which measures the company’s asset value in a liquidation.

“The break-up story may now gain ‘legs,’” Wheeler said in a note to investors on July 5. “The new CEO may be under political pressure to carry this process out.”

Walker, 72, said his first task will be to find a replacement for Chief Executive Officer Robert Diamond, who resigned in July, after the fines by U.S. and U.K. regulators for rigging Libor.

Walker will review pay policies and the balance between retail and investment banking, the Sunday Times reported Aug. 12. The investment-banking unit may be cut in size by as much as a fifth, the newspaper reported, citing people it didn’t identify.

Breakup Opposition

George Godber, a fund manager who helps oversee about $250 million at Charles Stanley & Co.’s Matterley division in London, also backs the universal banking model.

“Right now a breakup would unlock a lot of value, but over the longer term it would be a bad strategic decision,” said Godber, who sold his Barclays shares after the Libor fine. “There’s the risk that management and lawmakers will make the wrong short-term decision to appease the public.”

Chirantan Barua of Sanford C. Bernstein & Co. said he opposes a split because of concerns about the investment bank’s ability to maintain capital levels and fund itself and the potential loss of corporate clients. Barua warns against a breakup, even though he said investors are not placing a high market value on the investment bank and the retail unit should be valued higher.

Still, the London-based analyst estimates Barclays is worth 307 pence a share based on a sum-of-the-parts analysis, according to a June report, 68 percent more than Monday’s closing price.

‘Bad Idea’

“Splitting up Barclays is a bad idea economically, legally and politically,” Barua said in a telephone interview.

Cormac Leech, an analyst at London-based Liberum Capital, said the investment bank would struggle to fund itself cheaply enough and would lose revenue synergies with the rest of the company.

Barua and Leech contrast with Canaccord’s Hunt, who argues that his firm’s analysis suggests the investment bank is self- funding and not reliant on the group for liquidity.

A split would be going a step further than the U.K. government’s plan to force the country’s lenders to insulate consumer banking units from the investment bank by 2019 to try to shield customers and taxpayers from another financial crisis.

Government Rules

The Independent Commission on Banking recommended in a September report that banks partially separate their consumer and investment banks. This includes creating independent boards and risk committees and maintaining separate balance sheets.

“We’re going to separate the investment bank and retail bank anyways, so all we’re saying is just stick a quote on both,” said Canaccord’s Hunt. “Give shareholders that choice.”

The debate hasn’t been limited to the U.K.

Sanford “Sandy” Weill, whose creation of Citigroup Inc. ushered in the era of U.S. banking conglomerates a decade before the financial crisis, said in a July 25 interview on CNBC that it’s time to break up the largest banks to avoid more bailouts.

The same day, Michael Mayo, an analyst at CLSA Ltd., said in an interview on Bloomberg Television that large U.S. banks, including Morgan Stanley, Citigroup and Bank of America Corp., should consider breaking up.

Separating Barclays’s divisions may also create takeover targets. The investment bank could attract companies in emerging markets including Chinese lenders, said Godber of Matterley, or it could be merged with another investment bank, according to Canaccord’s Hunt.

“Splitting the bank in two would help the valuation,” said Smith of Brown Shipley. “Barclays would be less risky but also less profitable without the investment bank. The investment bank could also have capital and funding difficulties. But if the investment bank sufficiently cut its risk, it could attract cash from investors.”

© Copyright 2014 Bloomberg News. All rights reserved.

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