February 23, 2017

Staley’s Auctioneering Is Paying Off For Barclays

by Breakingviews

Jes Staley’s decisive dealmaking is polishing Barclays’ balance sheet. The UK lender’s chief executive on Thursday announced fourth-quarter earnings of 99 million pounds ($123 million). He hailed the near-completion of a series of big non-strategic asset divestments – six months early.

The jump in Barclays’ key capital indicator was a surprise. The metric, which measures common equity Tier 1 capital as a proportion of risk-weighted assets, came in at 12.4 percent. Consensus forecast compiled by Barclays had pegged it at 11.8 percent.

About half of the 80 basis points rise in the three months to December is thanks to Staley’s sales vigour in cutting risk-weighted assets. The disposal whirlwind since he took the reins two years ago has swept away six businesses, investment banking offices in nine countries and may soon extend to the bulk of the bank’s African business – albeit for an expected cost for the latter of about 765 million pounds.

A large portion of the other 40 basis points of Barclays’ capital boost in the three months to December may be less permanent. Of the 2 billion pound rise in common equity Tier 1 capital over the quarter, 1.4 billion pounds came down to two factors: adjustments to the bank’s defined-benefit pension scheme deficit and the bank’s currency translation reserve. As these respectively depend on the vagaries of UK government bonds and global currency markets, their part in the balance-sheet gains could prove transitory. That said, deconsolidating Barclays Africa would probably increase the CET1 ratio again by around 75 basis points.

Returns are ticking up too. Exclude a one-off charge Barclays took to align the accounting of its staff compensation to business performance, and return on tangible equity (RoTE) in the fourth quarter would have been 9 percent. Considering UK banks book the entirety of a balance-sheet levy cost in the fourth quarter, Barclays should be making an economic profit if it can sustain this performance. That means the bank’s stock looks reasonable value, given it trades at a 20 percent discount to forecast tangible book value.

Pure investment bank profitability is more questionable. These are good conditions for the business and Barclays has gained market share in equities trading, underwriting and advisory. But the UK bank’s international division – which also includes credit cards, a generally higher-returning business – would only have made an RoTE of 9 percent without one-offs. Now Staley’s restructuring is delivering welcome operational simplicity, he may have more time to put that right.

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