Buy Barclays Plc (BARC) - Target Price 425p
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T: +44 (0) 1872 262620 F: +44 (0) 1872 265326 E: mail@galvan.co.uk W: www.galvan.co.uk S P E C I A L R E P O R T Buy Barclays Plc (BARC) Target Price 425p Are things hotting up at Barclays? Barclays has defied the critics and emerged as a core US operations and its flagship building in potential winner from the financial crisis. As rival Manhattan. banks are left licking their wounds, Barclays is busy So in short, rather than paying $88 billion for third- building its empire. Forget back to basics, for tier ABN Amro, Barclays scooped up the best bits of Barclays it’s more a case of back to bonuses. top-tier Lehman Brothers for $1.75 billion. The deal has been truly transformational. Coming to America No one can say Barclays lacks ambition or luck for And to the victor, the spoils that matter. Barclays had a near death experience Investment banking is one industry that has when they bid for ABN Amro near the peak of the undergone a once in a lifetime shake-out in recent market in 2007. Luckily RBS stepped in and saved times. Names that have been around since the turn Barclays from financial ruin. Today RBS is 70% of the last century have disappeared. Wall Street owned by the UK government (rising to 84% soon), has lost three of its five biggest names as Bear while Barclays has kept its commercial Stearns, Lehman Brothers and Merrill Lynch have independence. collapsed or been snapped up at fire sale prices. Having escaped disaster in 2007, Barclays In Europe, a similar shake out has taken place. Of turned its attention to Lehman Brothers in the European players, only really Credit Suisse can late 2008. claim to have strengthened their market position. Most big European banks have retreated or exited Lehman Brothers were on the brink of collapse and altogether from investment banking. the US government were desperate to find a buyer. Barclays expressed strong interest but the deal was An industry shake-out tends to strengthen blocked by UK regulators due to Barclays’ desire to those who remain. The survivors emerge place most of Lehman’s problem assets in a from the ashes to find a less crowded separate structure. Once again it was a blessing in marketplace. disguise. As we know, Lehman’s then filed for bankruptcy. This allowed Barclays to negotiate a much better and cleaner deal, acquiring Lehman’s Galvan Research and Trading, CMA House, Newham Road, Truro, Cornwall, TR1 2SU Risk Warning Notice: Galvan Research And Trading Ltd is authorised and regulated by the Financial Services Authority (FSA). Whilst every attempt is made to ensure the accuracy of the information provided, no responsibility can be accepted for any inaccuracy. The information provided cannot be relied upon as constituting a recommendation, nor construed as any offer to sell, or any solicitation of any offer to buy investments. No liability is accepted for any loss whether direct or indirect, incidental or consequential, arising out of any of the information being untrue and / or inaccurate, except to the extent caused by the wilful default Winner: Best Equity Derivatives or gross negligence of Galvan Research And Trading, its employees, or which arises under the Financial Services Advisor, Best CFD Advisor And Markets Act 2000.
T: +44 (0) 1872 262620 F: +44 (0) 1872 265326 E: mail@galvan.co.uk W: www.galvan.co.uk S P E C I A L R E P O R T Buy Barclays Plc (BARC) Barclays estimate that the top five global All quiet on the domestic front investment banks (Goldman Sachs, JP Morgan, Deutsche Bank, Credit Suisse and BarCap) had 41% At the moment, it appears as though Barclays is market share of all capital market revenues in the firing on only one engine. It’s estimated that BarCap first quarter of this year compared to 25% three could contribute up to 60% of profits in the short years ago. term. CEO, John Varley, is keen to let us know that this isn’t the plan for the longer term and he is As of today, BarCap has managed to become top aiming for "two-thirds of the group's profit" to come three in areas such as interest rates, fixed income, from retail and commercial banking and Barclays foreign exchange and commodities, but some pieces Wealth. Until then, Barclays has more in common have been missing from the puzzle – prime with Goldman Sachs than its UK retail rivals like brokerage, equities and M&A (mergers and Lloyds and RBS. acquisitions). The Lehman’s acquisition has helped plug BarCap’s missing pieces, particularly in On the domestic front, Barclays may not be in great equities. While BarCap can now offer the full range shape now but it has an opportunity to steal a of investment banking services, it is now eager to march on its UK rivals right now. push become top tier in all categories. The best way Barclays is free to lend where they see fit as they to do that is to hire while its competitor’s fire. are not participating in the government’s Asset BarCap has also gone on a massive hiring spree Protection Scheme. Lloyds and RBS have taken their poaching top talent with fat salaries and cash eye off the ball as they sort through the mess in bonuses. 2,000 people have joined BarCap since the their existing loan books. Profit margins have beginning of the year to build up its prime significantly widened this year for both mortgages brokerage, equities and M&A advisory businesses. and corporate lending. As Barclays is not anywhere Barclays plans to hire an additional 1,000 staff in near as burdened in these areas as RBS or Lloyds, the near future. Teams of M&A advisors are being there is a real opportunity to gain significant market added in the UK, Germany, France, Italy and Japan share. For example, only 18% of Barclays’ loans are whether there is any work for them to do or not. for UK mortgages and its average loan to value (LTV) is around 50%, which is a very comfortable position to be in. Our view is that BarCap have timed things right so far and industry league tables indicate they are winning market share in a Commercial real estate presents an even less crowded industry. bigger opportunity as Barclays’ loan book is only around a fifth of the size of Lloyds and RBS. Galvan Research and Trading, CMA House, Newham Road, Truro, Cornwall, TR1 2SU Risk Warning Notice: Galvan Research And Trading Ltd is authorised and regulated by the Financial Services Authority (FSA). Whilst every attempt is made to ensure the accuracy of the information provided, no responsibility can be accepted for any inaccuracy. The information provided cannot be relied upon as constituting a recommendation, nor construed as any offer to sell, or any solicitation of any offer to buy investments. No liability is accepted for any loss whether direct or indirect, incidental or consequential, arising out of any of the information being untrue and / or inaccurate, except to the extent caused by the wilful default Winner: Best Equity Derivatives or gross negligence of Galvan Research And Trading, its employees, or which arises under the Financial Services Advisor, Best CFD Advisor And Markets Act 2000.
T: +44 (0) 1872 262620 F: +44 (0) 1872 265326 E: mail@galvan.co.uk W: www.galvan.co.uk S P E C I A L R E P O R T Buy Barclays Plc (BARC) Hidden dangers It’s been estimated that if Barclays valued The Barclays bank sheet is still the subject of great their structured credit derivatives using the debate. Some clear progress has been made on two same methods as RBS it could result in an fronts this year. Firstly, the sale of Barclays Global additional £3 billion in losses. Investors (BGI) has increased the tier 1 capital ratio to 8.8% from 5.6% at the end of last year. That’s Barclays has always argued that it’s an apples and still lower than Lloyds, RBS and HSBC, but it doesn’t oranges comparison, implying their assets are better stand out like a sore thumb anymore. It should also quality. The benefit of taking your medicine early is be noted that Barclays has not had the scale of that you bounce back quicker. We believe Barclays impairments that the other UK banks have suffered, will keep reporting impairments well into next year. so a lower capital ratio for Barclays could be Perhaps an even more concerning issue than the justified. balance sheet is the rise in trading risk. The daily The second area of improvement is that the balance average value at risk (VaR), a way of measuring the sheet is shrinking. The value of its assets has trading risk, was 40% higher in the first half of 2009 declined from more than £2 trillion to £1.5 trillion in than during the second half of last year. Welcome just six months. This is partly because sterling has onboard Lehman’s. Daily VAR was almost double recovered but also a deliberate decision by the bank the level in the first half of 2008. So what does all to reduce its exposure to complex derivative deals. this mean? It means Barclays are taking on a lot greater trading risk than before, which is helping to However there are still some hidden dangers drive profits at BarCap. That’s all dandy when you’re lurking. It’s long been suspected that Barclays are in strong markets, but when things turn sour we will drip feeding losses to the market. This may be found out how well the risk is being managed. happening for two reasons. Barclays may face greater balance sheet risk going Firstly Barclays has yet to report an overall loss. Its forward and investors may perceive it as a riskier no co-incidence that the banks that have reported and less reliable business. big losses have then sacked their top brass. Barclays haven’t reported an overall loss and their The world is your oyster management team have kept hold of their jobs. Barclays has a more international business mix than The second reason to believe Barclays are softening RBS and Lloyds. Lloyds is effectively a UK retail and the landing is that their “marks” or prices used on commercial bank. RBS is retreating from its global more exotic assets are questionable. Other banks ambitions and focusing instead on UK and US retail like RBS and Lloyds have marked down their assets and commercial banking. Barclays has a far broader far more than Barclays. base of operations including Barclaycard, BarCap, Galvan Research and Trading, CMA House, Newham Road, Truro, Cornwall, TR1 2SU Risk Warning Notice: Galvan Research And Trading Ltd is authorised and regulated by the Financial Services Authority (FSA). Whilst every attempt is made to ensure the accuracy of the information provided, no responsibility can be accepted for any inaccuracy. The information provided cannot be relied upon as constituting a recommendation, nor construed as any offer to sell, or any solicitation of any offer to buy investments. No liability is accepted for any loss whether direct or indirect, incidental or consequential, arising out of any of the information being untrue and / or inaccurate, except to the extent caused by the wilful default Winner: Best Equity Derivatives or gross negligence of Galvan Research And Trading, its employees, or which arises under the Financial Services Advisor, Best CFD Advisor And Markets Act 2000.
T: +44 (0) 1872 262620 F: +44 (0) 1872 265326 E: mail@galvan.co.uk W: www.galvan.co.uk S P E C I A L R E P O R T Buy Barclays Plc (BARC) Banco Zaragozano of Spain, a majority stake in credit risk will allow big banks to offer lower deposit Absa of South Africa and a stake in BlackRock of the rates and attract cheaper funding. The result is a US. Cosy Club of big banks taking commercial advantage of their special status. With this in mind, This diversity has benefited Barclays in 2009 as the we believe Barclays may even benefit from a banks with big capital markets divisions (like tougher regulatory regime. BarCap) have helped offset weak UK retail and commercial operations. The final say With Barclays’ capital ratio almost 9%, balance Although most economies face challenges sheet fears are subsiding. Another round of fund at present, Barclays’ diversification both raising looks unlikely. Barclays also passed the FSA’s geographically and operationally, should stress test, adding further credibility to its capital lower its overall risk profile. position. The markets attention is shifting away from net Cosy club asset value to earnings potential. Valuations based There has been a big political drive, both here and on earnings potential will be far higher than those abroad, to reform the banking industry and subject based on liquidation of assets. In light of significant it to stricter rules and greater scrutiny. progress made at BarCap this year, both in terms of market share and recruitment, we have made an The most likely targets for regulatory reform upward revision to our sum-of-parts valuation are the major retail and investment banks model. considered “too big to fail”. We currently value Barclays at 425p a While the big banks may face more draconian rules share. going forward, it may actually strengthen their competitive position due to the Law of Unintended Consequences. If a bank is deemed “too big to fail”, it means it is guaranteed by the state. This means that customers who deposit money and institutions that help fund banks will consider that their money is safer with a big bank than other banks and financial institutions. That is a perfectly logical conclusion. The whole financial system operates on trust or its fancier name - credit risk. Having lower Galvan Research and Trading, CMA House, Newham Road, Truro, Cornwall, TR1 2SU Risk Warning Notice: Galvan Research And Trading Ltd is authorised and regulated by the Financial Services Authority (FSA). Whilst every attempt is made to ensure the accuracy of the information provided, no responsibility can be accepted for any inaccuracy. The information provided cannot be relied upon as constituting a recommendation, nor construed as any offer to sell, or any solicitation of any offer to buy investments. No liability is accepted for any loss whether direct or indirect, incidental or consequential, arising out of any of the information being untrue and / or inaccurate, except to the extent caused by the wilful default Winner: Best Equity Derivatives or gross negligence of Galvan Research And Trading, its employees, or which arises under the Financial Services Advisor, Best CFD Advisor And Markets Act 2000.
T: +44 (0) 1872 262620 F: +44 (0) 1872 265326 E: mail@galvan.co.uk W: www.galvan.co.uk S P E C I A L R E P O R T Buy Barclays Plc (BARC) While evidence of green shoots builds daily, the rolling recession is still crashing its way through the loan books of UK banks, including Barclays. The road to recovery will be littered with potholes. Strengths Weaknesses • Good spread of business • Balance sheet uncertainty • Stable management team • Lower capital ratio than other UK banks • Powerhouse in investment banking • Losses from conventional loan book • Has avoided government capital • yet to peak • Opportunities from BlackRock deal • Less stable earnings going forward Galvan Research and Trading, CMA House, Newham Road, Truro, Cornwall, TR1 2SU Risk Warning Notice: Galvan Research And Trading Ltd is authorised and regulated by the Financial Services Authority (FSA). Whilst every attempt is made to ensure the accuracy of the information provided, no responsibility can be accepted for any inaccuracy. The information provided cannot be relied upon as constituting a recommendation, nor construed as any offer to sell, or any solicitation of any offer to buy investments. No liability is accepted for any loss whether direct or indirect, incidental or consequential, arising out of any of the information being untrue and / or inaccurate, except to the extent caused by the wilful default Winner: Best Equity Derivatives or gross negligence of Galvan Research And Trading, its employees, or which arises under the Financial Services Advisor, Best CFD Advisor And Markets Act 2000.
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