Shares in Barclays (LSE: BARC) have risen by almost 2% today after the bank announced the sale of a range of non-core assets in Portugal. While their sale will cause the bank to book a loss of around £200m, investors seem to be content that Barclays is making the right move with regard to reducing risk-weighted assets and increasing margins in the longer term.
The sale involves the disposal of Barclays’ retail banking, wealth and investment management business, as well as part of its corporate banking business which serves small and medium-sized enterprises, in Portugal to Bankinter for around €100m. Separately, Barclays will also sell its insurance business in Portugal to Bankinter Seguros de Vida for around €75m, with Barclays continuing to operate Barclaycard, investment banking and multinational corporate banking in Portugal.
Depending on currency fluctuations and the profitability of the divisions, their sale will reduce Barclays’ risk weighted assets by around £1.7bn on completion. It is also another step on Barclays’ road to rebalancing which involves a number of divisions being sold where the risk/reward ratio is relatively unfavourable. And, while it means a considerable amount of upheaval in the short run (as well as losses being booked in the case of its Portuguese assets) the strategy should provide the bank with a brighter and more profitable future.
Clearly, Barclays is undergoing a major transition at the present time, with a new CEO yet to be found and other assets yet to be disposed of. As such, many investors may feel that now is the wrong time to buy a slice of the bank as, realistically, its performance could suffer in the short run from major changes and a new CEO may require a bedding in period to familiarise himself/herself with the bank’s operations. In addition, they may wish to refresh the bank’s strategy and pursue a different approach than that favoured by the previous CEO, Antony Jenkins.
While this undoubtedly creates uncertainty, it also offers considerable opportunity. That’s because, ultimately, Barclays is a relatively sound business which has remained profitable throughout the credit crunch and is forecast to post double-digit earnings growth in each of the next two years. Certainly, it is likely to undergo further change but, as has been seen today, investors seem to be comfortable with the direction in which the business is heading and, with further progress set to come regarding its current strategy, share price gains are very much on the cards.
That’s especially the case since Barclays trades on a very low valuation. For example, its price to book (P/B) ratio stands at just 0.67 and, while its net asset value is likely to fall as it sells more non-core assets, the current discount being applied by the market appears to be difficult to justify when Barclays is performing so well as a business. And, with an improving UK and global economy likely to provide a boost to its performance moving forward, now could be the perfect time to buy a slice of the bank for the long term.
