Why Barclays PLC Could Split Up To Maximise Value

Barclays PLC (LON: BARC) could split up to reverse its fortunes.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Barclays (LSE: BARC) (NYSE: BCS.US) is currently facing a tidal wave of challenges, all of which have overshadowed the bank’s share price for much of the past year. 

Barclays

Indeed, one of Barclays’ most pressing problems is the requirement by regulators that the bank ringfence its UK retail operations. Ringfencing requires the bank to setting up a separate retail bank with independent management team and computer system — a huge structural overhaul. 

Then there are the lawsuits pending against the bank. Some analysts have predicted that Barclays could be facing litigation losses in excess of £7bn over the next four years, although this is a “worst-case scenario”. 

And finally, Barclays’ capital position is under scrutiny, as the bank tries to appease regulators by lowering its leverage ratio and shrinking the balance sheet.  

With pressures against the bank rising, some analysts have floated the idea that, to try and save its skin, Barclays could split itself in two. 

A radical idea 

Aside from Barclays’ investment banking arm, where most of the bank’s troubles lie, Barclays is in good shape. Indeed, City analysts believe that if Barclays were to split off its UK retail banking operations, they could fetch as much as £30bn on a multiple of 12 times earnings. Barclays’ current market cap is £37bn. 

Not only would this spin-off solve the problem of ringfencing, but the proceeds received would crush concerns about Barclays’ balance sheet by adding billions to the bank’s its capital cushion. City analysts have estimated that after the float, the parent company would have a core tier one ratio of 12.8% and a leverage ratio of 4.4% by 2015. Management is currently targeting a leverage ratio of 4% by 2016. 

This break-up would also help Barclays distance itself from litigation costs, which are likely to be incurred by the investment bank. 

However, the above analysis does leave out one key point; what will happen to Barclays’ world leading credit card business, Barclaycard?

World leading

Put simply, Barclaycard is Barclays’ most profitable business. Indeed, last year the credit card company’s return on equity – a key measure of bank profitability – stood at 19%. Barclays’ investment banking return on equity was less than 5% during the same period. 

Barclays could really benefit from spinning off, or selling Barclaycard. For example, companies such as American Express, which offer a similar service to Barclaycard, trade at around 20 times earnings. This would give Barclaycard a valuation of more than £20bn, using pre-tax income. 

Still, as of yet there are no break-up plans on the cards. So, it’s up to you whether you decide to buy, sell, or hold Barclays. However, with so many risks on the horizon Barclays may not be suitable for every portfolio and I’d strongly suggest you look a little closer at the company before making any trading decision.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »