Investment Banking Will Help Turn Around Barclays PLC

Barclays PLC (LON:BARC) bets on casino banking.

| 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.

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.

Investment bankers aren’t exactly flavour of the month, or year — well, decade, so far. The self-styled masters of the universe had a not inconsiderable hand in trashing the financial system and destroying the savings of an army of small investors in high-street banks in the process.

But loathe them or just tolerate them, they do provide a service for which there is demand, and the business makes money for investors as well as the bankers themselves. It could prove lucrative for shareholders in Barclays (LSE: BARC) (NYSE: BCS.US).

Top ten

Both Barclays and RBS currently rank among the top 10 global investment banks. RBS’s former CEO Stephen Hester lost his battle to keep a big investment banking operation within the state-owned bank. Before he was unceremoniously ousted by the Chancellor, he’d agreed to shrink investment banking to a third of total revenues. That suited popular opinion and political expediency, but possibly Mr Hester had the more economic motive.

When new CEO Antony Jenkins inaugurated his strategic review of Barclays last year, many thought it would presage a shrinking of the investment bank that brought in well over half the group’s profits. In fact, the review was remarkably kind to the investment bank. A couple of embarrassing activities — structuring tax avoidance schemes and speculating in food commodities — were summarily ditched, and the bank retreated from Continental Europe and Asia.

If all goes to plan, the investment bank will be delivering a return on equity of 11-12% by 2015 and around 14-15% consistently once legacy assets have run off. Risk assets will be about half the group’s total.

Vindication

If it works, it will be a vindication of Barclays’ daring and counter-cyclical decision to buy Lehman’s US business when it failed in 2008. Barclays now has a leading position in investment banking in the US and UK, the two biggest markets. The bank boasts that its US clients see it as a US institution, whilst its UK clients see it as British.

The investment bank is now toeing the more sober group line. Costs have been cut, risk assets trimmed, and stable, low risk revenues emphasised.

It’s not all plain sailing. On Wednesday, S&P downgraded Barclays a notch over concerns of riskiness in investment banking due to volatile markets, unwinding of quantitative easing and the eurozone crisis.  And the Frank-Dodds Act requiring foreign banks to ring fence their US operations will affect Barclays more than most banks.

Cheap

I think Barclays’ shares, trading on a forward P/E of 8.2 and 0.7 times book value, are cheap. But with the investment bank set to remain half of Barclay’s business, you need to be comfortable with the risks and prospects for investment banking to rate the shares a buy.

Banking is cyclical and Barclays’ growth depends on the economy. So the Motley Fool‘s pick for its top growth stock is in another sector altogether. The accolade goes to a company that has survived and prospered despite its business being transformed by digital technology. As a result it has grown steadily over many years.  To discover the identity of the company, you can download a free in-depth report by clicking here — it’s free.

> Tony does not own any shares mentioned in this article.

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.

More on Investing Articles

Middle-aged black male working at home desk
Investing Articles

Are these top-traded FTSE 100 shares the best to buy for 2024?

The market has disagreed with me pretty much all year on the best buys among FTSE 100 shares. But, are…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

My five favourite forms of passive income

I've been looking for ways to pump up my passive income, so I can retire richer. But which of these…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

What’s the FTSE 100’s best 10% dividend yield?

Depressed prices have thrown up some golden opportunities on the FTSE 100. Which of these 10%-yielding Footsie stocks should I…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

BP shares look dirt cheap

Are BP shares a brilliant bargain? The financials look excellent and it’s hard not to call them anything other than…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

My 12 fears for the stock market in 2024

After a terrific year for global stock markets in 2023, what can I look forward to in 2024? As a…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

2 income shares for bumper dividends in 2024

I own these two income shares for their outstanding ability to deliver billions of pounds of cash dividends each year…

Read more »

Investing Articles

Could the IAG share price hit £2.11 in 2024?

According to analysts, the IAG share price could be headed for £2.11. But Stephen Wright wonders whether the stock is…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

1 hot UK growth stock I’m buying right now

I've more than doubled my money on this UK growth stock. But with a 948% boost to earnings, I think…

Read more »