BREAKINGVIEWS-Normalised Barclays could offer substantial upside

Tue Jul 24, 2012 10:14am BST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Robert Cole

LONDON, July 24 (Reuters Breakingviews) - Barclays (BARC.L) in an ugly fix. The rate-rigging scandal has laid waste to the bank’s senior leadership and trashed its reputation with regulators, politicians and customers. Barclays shares have slumped to barely half the average traded price over the last 12 months. There are plenty of reasons to be wary. But a “normalised” Barclays could offer investors some striking gains.

Breakingviews’ latest calculator compares Barclays’ current rating to that of its largest global rivals. Based on a blended average of three closely watched metrics - the earnings multiple, dividend yield and price to book ratio - the British bank was trading at a 38 percent discount to its peer group on July 20.

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    Calculator: Barclays’ scandalous discount
    Run the numbers: r.reuters.com/wem59s
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    There are many good reasons why the discount is justified.
Following the departures of Bob Diamond and Jerry del Missier,
Barclays has neither a chief executive nor a chief operating
officer. Marcus Agius, the chairman, is also on the way out. No
recovery is possible until the bank recruits new leadership.
    But just installing a new CEO is no guarantee of a revival.
The row over manipulation of interbank lending rates has exposed
regulators’ broader concerns about the bank. Adair Turner,
chairman of the UK’s Financial Services Authority, wrote to the
Barclays chairman in April this year expressing his worries
about the “aggressive...interpretation of rules and
regulations.” Barclays’ depressed valuation suggests investors
share those doubts.
    The scandal has also revived political demands for a
complete separation of retail and investment banking. That would
destroy value for Barclays, as its investment bank would face
higher funding costs on its own than as part of a larger group.
But the bank’s ability to resist such a move may be limited.
    More generally, the economic outlook in Barclays’ European
backyard is another drag on valuation. While U.S. peers are
hardly in clover, they currently enjoy a more benign economic
and regulatory environment.
    Given its current woes, it is hard to argue that Barclays
shares are undervalued. But it is unlikely to be a laggard
forever. Just returning the bank’s valuation to the average of
its peers would offer substantial upside. All the more reason
for the board to get on with the task of normalising Barclays.
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    CONTEXT NEWS
    - Barclays’ Chief Executive Bob Diamond resigned on July 3
in the wake of revelations that staff at the bank had attempted
to manipulate the London Interbank Offered Rate (Libor). Jerry
Del Missier, the chief operating officer, resigned the same day.
Marcus Agius, the chairman who had said he would step down the
previous day, was temporarily re-instated pending the
appointment of replacements for all three jobs.
    - Shares in Barclays, the UK bank, trade at a discount to
its nine closest global peers when judged on commonly used
valuation metrics based on Thomson Reuters Starmine data on July
20.
    - E-book: Diamond's not forever: r.reuters.com/nyf59s
- For previous columns by the author, Reuters customers can
click on [COLE/]
    (Editing by Peter Thal Larsen and David Evans)
    ((robert.cole@thomsonreuters.com))    
Keywords: BREAKINGVIEWS BARCLAYS/
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