Barclays eyes smaller units for growth in strategic review, risks investor ire
12/07/2023 14:17
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Executives study allocating more capital to high-potential
units
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Some shareholders, analysts would prefer stock buybacks
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Barclays shares down around 3.5% year-to-date
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Some investors question bank's overall business mix
By Sinead Cruise, Lawrence White and Stefania Spezzati
LONDON, July 12 (Reuters) - Barclays BARC.L is betting
it can revive its wilting share price by upping investment in a
crop of its smaller businesses including U.S. credit cards,
sources familiar with the matter said. But some of its top
shareholders would prefer the quicker fix of a buyback.
Chief Executive C.S. Venkatakrishnan is studying plans to
allocate more capital to the bank's wealth management, U.S.
credit card and global payments activities to boost
returns, according to people familiar with his thinking and
reported here for the first time, after drafting in Boston
Consulting Group (BCG) to review strategy earlier this year.
A team of BCG consultants has taken up temporary residence
at the bank's headquarters in London's Canary Wharf financial
hub to help management brainstorm an optimal investment plan,
one source familiar with the BCG review said.
The lender is pursuing an in-house review as well, the
source added.
Another source inside Barclays' investment bank, talking
anonymously because they are not authorised to speak to the
media, said lower staff attrition at its technology and back
office operations had started to worry cost-conscious managers.
The BCG review could lead to layoffs, the source familiar
with the review said, although no decisions have been made.
"As you would expect, we frequently work with various
external consultants," a Barclays spokesperson said.
A spokesperson for BCG declined to comment.
Some top Barclays investors, however, told Reuters they
would have misgivings about a plan to prioritise investment over
capital distributions.
They question the logic of pumping more capital into
divisions that are small relative to their competitors as the
global economy shivers and the lender's shares suffer.
Instead, they want to see tighter cost control, twinned with
bigger buybacks and dividends after the bank completed a modest
500 million pound ($646 million) buyback programme in April.
"We are keen to see the businesses we invest in acquire and
grow if they can do so in a way that adds shareholder value,"
said Richard Marwood, senior investment manager at Royal London
Asset Management, one of Barclays' 30 largest shareholders,
according to Refinitiv.
"The hurdle they have to clear is: are the acquisitions
better uses of capital than retiring equity? When your shares
are lowly valued, that is a tougher benchmark to beat."
'NERVOUS'
For Venkat, as the veteran banker is commonly known, the
stakes are high.
Two years into his tenure, Barclays' stock price to tangible
book value, a measure of market value against assets, is 0.54,
the lowest among major British banks and well below rival HSBC's
HSBA.L 0.87, Refinitiv data shows.
Barclays emerged from the 2008 financial crisis with
a once-in-a-generation opportunity to bulk up on Wall Street,
after buying Lehman Brothers' U.S. operations. But nailing the
right business mix to woo new investors without repelling its
more conservative backers has challenged executives ever since.
After defeating a push by activist investor Edward Bramson
to shrink its investment bank in 2021, the 330-year old lender
has stuck to its transatlantic universal banking model spanning
investment banking, and consumer and corporate lending,
gradually growing group profits.
But a recent shake-up at its investment bank has raised
concern about Barclays' ability to compete amid a worldwide
dealmaking slump.
A U.S. securities trading blunder that triggered a $361
million regulatory penalty and blighted recent earnings remains
a drag on shareholder confidence too.
That has made investors "nervous about investment over the
simple maths of buying back shares at half book value," said
Richard Buxton, investment manager at Jupiter Asset Management
JUP.L , a top 25 Barclays shareholder, according to Refinitiv.
"I can understand why Barclays wants to invest more behind
sub-scale businesses if they can evidence getting the returns
from them," he added.
Some smaller investors hope the BCG review might offer a
fresh take on whether an investment banking spinoff could give
shareholders the value they crave.
"You might get a better valuation if you demerge the
investment bank ... They are not valued properly together," said
Alan Beaney, chief executive at RC Brown Investment Management,
which has held Barclays shares since 2012.
A Barclays spokesperson said the bank's businesses continued
to perform well and its business mix was "robust".
OVERHAULS
Barclays has also engaged another global consultancy to
analyse whether some of its payments businesses should be
expanded or combined with other providers, Reuters reported in
June.
Meanwhile, Barclays' stock has fallen around 3.5% this year,
underperforming a 10% gain in a benchmark index of European
banks .SX7P and internationally-focused European rivals like
BNP Paribas BNPP.PA and HSBC, which have risen by around 5.5%
and 18% respectively.
Barclays underwent several major overhauls in the decade
following the 2008 financial crisis, including a 2014 jobs cull
and a 2016 exit from Africa.
But while such strategies have helped to keep Barclays in
the black throughout the pandemic and the current bout of
inflation-led economic malaise, management faces a battle to
convince investors they can depend on those returns.
Barclays' goal is to hit a return on tangible equity, a key
measure of profitability, of more than 10%. While its British
retail and business banking arm delivered 18% in 2022, the two
other divisions which house payments and investment banking
narrowly scraped the 10% goal.
"We estimate the bank ought to be able to generate around 19
billion pounds of profit over the course of 2023-2025, and we
believe more of this should be returned to shareholders to
better address the share price weakness as opposed to another
strategy review," Jefferies analysts said in a note.
($1 = 0.7736 pounds)
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(Editing by Elisa Martinuzzi and Mark Potter)
((lawrence.white@thomsonreuters.com; +44 20 7513 5083; Reuters
Messaging: @ReutersLawrence))