Barclays Should Break Up, Spin Off Lehman, Bernstein Saysby
Jes Staley should also exit Africa, sell U.S. cards business
Bernstein cuts earnings forecast, price target in note
Barclays Plc Chief Executive Officer Jes Staley should take the “big decisions” to spin off its investment bank and sell its Africa unit to fix the U.K. lender, which trades at about 40 percent less than its book value, according to Sanford C. Bernstein Ltd.
Staley’s best option is to break up the bank with an initial public offering of a reconstituted Lehman Brothers and a sale of the U.S. credit card business, analyst Chirantan Barua wrote Friday in an open letter to the CEO. The new American securities unit would require $6 billion of funding and should be listed in 2020 or 2021 with a new management team, he said.
“The elephant in the room is the investment bank,” Barua said. “It needs major surgery but all that we’ve had is patches here and there,” he said. “Shrinking to profitability is possibly one of the worst strategies ever in the history of banking” and “housing what is essentially a U.S. investment bank inside a U.K. retail bank” is “an absolute investment nightmare,” he said.
Staley, 59, and Chairman John McFarlane, 68, joined the British lender last year with a mandate to revive profit growth and reverse a two-year slide in shares that has left the bank trading below its book value, meaning investors think the company is worth less than its assets. Last month, Barclays cut1,200 jobs at the investment bank, its least profitable division, and will exit nine countries, according to a person with knowledge of the matter. The board is also reviewing whether to keep its Africa business amid capital constraints.
Barclays owns 62 percent of Johannesburg-based Barclays Africa Group Ltd., the legacy of a 2005 deal by former Barclays CEO Robert Diamond. Michael Rake, the bank’s former deputy chairman, has said the bank must decide whether capital is best deployed in Africa amid slowing growth in South Africa and a need to shrink its balance sheet.
“The Africa business has absolutely no synergy whatsoever with the rest of the bank,” Bernstein’s Barua said in the note. “With just 10 percent of your earnings from Africa, you never get a bid up when the continent’s in a bull market, but when the rand is in free fall, investors are prompt to knock it out of your valuation.”
Bernstein cut its price target for Barclays to 180 pence from 255 pence a share and reiterated its “market perform” rating. The shares have fallen 21 percent to 173.55 pence this year, the worst performance among U.K. banks, after losing about 10 percent in both 2014 and 2015.
McFarlane in July pledged to double the stock price in as little as three years. It’s since fallen 35 percent and in October, the bank cut the target for its “core” return on equity to 11 percent from 12 percent for 2016. The investment bank reported a return on equity, a measure of profitability, of 5.2 percent in the third quarter and the lender has warned fourth-quarter income at the unit will fall 11 percent.
Investment bank CEO Tom King has said that Barclays is committed to running a “bulge-bracket” securities unit that offers a range of services including trading, deal advice, debt and equity services. However, Barua argues Barclays’s investment bank doesn’t have a viable business model that can earn more than its 10 percent cost of capital while it’s trimming costs and “juggling politicians and regulators” in the U.K.
An independent U.S. investment bank, which would primarily act as a broker-dealer for institutional investors, could initially be funded by capital raised from the sale of the credit card business in the country, Bernstein said. If more is required, management could tap private investors to shore up the balance sheet, because the standalone securities unit would not benefit from a base of cheap deposits from a consumer arm.
“Where should Barclays be in 2020?” Barua asked in the note. “A pure-play U.K. retail and commercial franchise with the best technology platform in Europe, with Africa gone and the U.S. investment bank carved out.”
Separately on Friday, Joseph Dickerson, a London-based analyst at Jefferies International Ltd., said Staley should sell the Africa unit as the growth outlook for the continent worsens and bad loans start to rise. It’s also “unlikely” the bank will be able to sustain dividend payments in 2016 and 2017, he wrote in a note to investors. He has a buy rating on the shares.
Staley, a former co-head of JPMorgan Chase & Co.’s securities unit who became CEO in December, will present a broader strategic update with full-year results on March 1. A spokesman for the bank declined to comment.