Bar­clays should break up, recre­ate Lehman in IPO: Bern­stein

The Pak Banker - - COMPANIES/BOSS -

Bar­clays Plc Chief Ex­ec­u­tive Of­fi­cer Jes Sta­ley should take the "big de­ci­sions" to spin off its in­vest­ment bank and sell its Africa unit to fix the U.K. len­der, which trades at about 40 per­cent less than its book value, ac­cord­ing to San­ford C. Bern­stein Ltd.

Sta­ley's best op­tion is to break up the bank with an ini­tial pub­lic of­fer­ing of a re­con­sti­tuted Lehman Brothers and a sale of the U.S. credit card busi­ness, an­a­lyst Chi­ran­tan Barua wrote Fri­day in an open let­ter to the CEO.

The new Amer­i­can se­cu­ri­ties unit would re­quire $6 bil­lion of fund­ing and should be listed in 2020 or 2021 with a new man­age­ment team, he said. "The ele­phant in the room is the in­vest­ment bank," Barua said. "It needs ma­jor surgery but all that we've had is patches here and there," he said. "Shrink­ing to prof­itabil­ity is pos­si­bly one of the worst strate­gies ever in the his­tory of bank­ing" and "hous­ing what is es­sen­tially a U.S. in­vest­ment bank in­side a U.K. retail bank" is "an ab­so­lute in­vest­ment night­mare," he said. Sta­ley, 59, and Chair­man John McFarlane, 68, joined the Bri­tish len­der last year with a man­date to re­vive profit growth and re­verse a two-year slide in shares that has left the bank trad­ing below its book value, mean­ing in­vestors think the com­pany is worth less than its as­sets. Last month, Bar­clays cut 1,200 jobs at the in­vest­ment bank, its least prof­itable divi­sion, and will exit nine coun­tries, ac­cord­ing to a per­son with knowl­edge of the mat­ter. The board is also re­view­ing whether to keep its Africa busi- ness amid cap­i­tal con­straints.

Bar­clays owns 62 per­cent of Jo­han­nes­burg-based Bar­clays Africa Group Ltd., the legacy of a 2005 deal by for­mer Bar­clays CEO Robert Di­a­mond. Michael Rake, the bank's for­mer deputy chair­man, has said the bank must de­cide whether cap­i­tal is best de­ployed in Africa amid slow­ing growth in South Africa and a need to shrink its bal­ance sheet. "The Africa busi­ness has ab­so­lutely no syn­ergy what­so­ever with the rest of the bank," Bern­stein's Barua said in the note. "With just 10 per­cent of your earn­ings from Africa, you never get a bid up when the con­ti­nent's in a bull mar­ket, but when the rand is in free fall, in­vestors are prompt to knock it out of your val­u­a­tion."

Bern­stein cut its price tar­get for Bar­clays to 180 pence from 255 pence a share and re­it­er­ated its "mar­ket per­form" rat­ing. The shares have fallen 21 per­cent to 173.4 pence this year, the worst per­for­mance among U.K. banks, af­ter los­ing about 10 per­cent in both 2014 and 2015.

McFarlane in July pledged to dou­ble the stock price in as lit­tle as three years. It's since fallen 35 per­cent and in Oc­to­ber, the bank cut the tar­get for its re­turn on equity to 11 per­cent from 12 per­cent for 2016. The in­vest­ment bank re­ported a re­turn on equity, a mea­sure of prof­itabil­ity, of 5.2 per­cent in the third quar­ter and the len­der has warned fourth-quar­ter in­come at the unit will fall 11 per­cent.

In­vest­ment bank CEO Tom King has said that Bar­clays is com­mit­ted to run­ning a "bulge-bracket" se­cu­ri­ties unit that of­fers a range of ser­vices in­clud­ing trad­ing, deal ad­vice, debt and equity ser­vices. How­ever, Barua ar­gues Bar­clays's in­vest­ment bank doesn't have a vi­able busi­ness model that can earn more than its 10 per­cent cost of cap­i­tal while it's slash­ing costs and "jug­gling politi­cians and reg­u­la­tors" in the UK.

"Where should Bar­clays be in 2020?" Barua asked in the note. "A pure-play U.K. retail and com­mer­cial fran­chise with the best tech­nol­ogy plat­form in Europe, with Africa gone and the U.S. in­vest­ment bank carved out." Sep­a­rately on Fri­day, Joseph Dick­er­son, a Lon­don-based an­a­lyst at Jef­feries In­ter­na­tional Ltd., said Sta­ley should sell the Africa unit as the growth out­look for the con­ti­nent wors­ens and bad loans start to rise.

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