When I think of banking company Barclays (LSE: BARC) (NYSE: BCS.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1) Discount to assets
The best time to buy a banking share is when the share price delivers a discount to the net asset value of the underlying company. That usually means buying the bank at or near to a low point in the general macro-economic cycle when profits forecasts are lower for the immediate future. When the economy is buoyant, bank profits tend to be riding high too, so we rarely see bank shares trading below net asset values then.
Barclays reported a net tangible asset value of 283p per share with its full-year results released in February. That makes today’s share price of 233p potentially attractive as it represents a discount of about 18%. Despite the firm’s troubles in recent years, Barclay’s asset value has been stable:
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Net assets (£m) | 58,478 | 62,262 | 63,959 | 59,986 | 63,949 |
However, I’d discourage using this measure alone to judge valuation. Barclays is currently engaged in reshaping its business model, which has potential to shrink the net asset value of the firm going forward.
2) Turnaround potential
Barclays’ CEO reckons the bank is de-risking its business for reputation and conduct. In plain-speak, that means sticking to what’s legally, morally and professionally right, from now on. There’s a lot of work to do on that front. For example, in June Barclays took a further £2bn of charges in relation to Payment Protection Insurance and interest rate hedging products redress. The firm has also exited businesses which are incompatible with its purpose and values, or where the company cannot generate attractive returns. In December, £331m of charges for litigation and regulatory penalties hit the bottom line.
Such radical reform isn’t cost free for investors as last year’s £5.8 billion dilutive rights Issue demonstrated. Barclay’s needed the money to shore up its balance sheet because high leverage had left the capital base looking flimsy. That’s why the company is focusing on its Leverage Plan, with the aim of getting gearing down. Leverage is an issue that regulators are focusing on, which means the firm must act to comply with forward regulatory requirements. That could affect profits in the future because lower leverage means scaled-back operations.
None of that affects top management’s approach to employee bonuses, though. The CEO said Barclays believes in paying for performance and paying competitively, which I read as ‘paying high’. The well-trotted argument goes that it is necessary to pay generous salaries and bonuses to attract the best performers to make money for the bank so it can reward shareholders. That implies that demand for top talent is greater than the available pool of potential super-employees on in the market.
I’m always amazed that a big firm like Barclays can’t find talented, keen and hard-working individuals willing to give their all for half the money that comes in these bank bonuses – even if the firm was to be the first to reduce the size of bonuses to a more palatable level in the eyes of the bank’s customers and share holders. Maybe other factors that I don’t know about influence high-bonus policy decisions in big companies, too.
Overall, the scale and scope of changes at Barclays gives hope that a better business will emerge, which gives Barclays turnaround potential within the cyclicality of the wider banking industry.
What now?
To me, banks like Barclays are less attractive than they were a few years ago, around 2009.
I think there’s still mileage in investing in Barclays, but banks can be such complex beasts to analyse that it’s hard to ensure that we are buying good value.
