Barclays (LSE: BARC) is one of the market’s most misunderstood companies. On the face of it, the bank is struggling to turn around its failing investment banking division, and legacy issues are costing the bank billions to wind up.
However, if you look past these short-term issues, Barclays’ underlying business is powering ahead. Then there’s Barclays’ secret weapon to consider: Barclaycard.
World leading
Barclaycard is one of the world’s top ten credit card issuers. The business handles around half of the credit card payments within the UK and South Africa and is the number one credit card issuer in Africa and Europe.
And Barclaycard is growing rapidly. The company has added over seven and a half million customers in the past few years, and unit profit jumped 15% during 2014 to just under £1bn.
Based on this figure, if Barclaycard was valued as an independent entity it could be worth around £14bn. This valuation is based on the fact that Barclaycard’s close peer American Express is trading at an earnings multiple of 14 times forward earnings.
Underlying growth
Barclaycard is not the only part of Barclays that’s growing rapidly. In particular, Barclays’ personal and corporate banking arm reported a 29% jump in adjusted pre-tax profits for 2014. What’s more, the divisions return on equity — a key measure of banking profitability — hit 12% during 2014. This is almost double the average return on equity reported by Europe’s largest banks for 2013.
It’s clear that Barclays’ underlying business divisions are charging ahead and for that reason, the best way to try and put a value on Barclays is to use a sum-of-the parts valuation. For example, as noted above the Barclaycard business should be worth in the region of £14bn by itself, if it was spun off from the Barclays group.
Additionally, the personal and corporate banking side of Barclays’ banking business, which produced profits of £2.1bn during 2014, could be worth around £25bn based on a multiple of 12 times 2014 earnings.
All in all then, the Barclaycard and Barclays personal businesses are worth in the region of £40bn alone. At present, Barclays’ market cap stands at £42.7bn.
But these numbers exclude Barclays’ African business and the group’s investment bank. These two units generated a profit of £775m during 2014. An undemanding multiple of 12 times earnings for these two businesses gives a valuation of £9.3bn.
Foolish summary
So overall, adding together all the parts of Barclays’ business gives a total value of £49.3bn, a full 15.5% above the bank’s current market cap.
