The constant negative news flow surrounding alleged Libor manipulation at Barclays (LSE: BARC) (NYSE: BCS.US) is, on the one hand, a constant source of frustration for shareholders.
However, for me, it is the opportunity to buy shares at a lower price, and that’s why I’m thinking of adding to my shareholding in the company.
Indeed, the latest news on the topic concerns two former employees of the bank who have apparently signed deals with the US Department of Justice as part of its investigation into alleged Libor manipulation.
Such deals would, if signed, avoid criminal charges against the individuals in return for full co-operation with the investigation.
Clearly, the continued rumblings around alleged Libor manipulation are unlikely to mean that sentiment picks up in the near-term, but I’m thinking about buying shares when they’re suppressed for the following three reasons.
Firstly, although the pre-credit crunch days seem like a long time ago, it is likely that those halcyon days will return once again. Indeed, Barclays was a highly profitable bank and even managed to deliver net profit of £10.3 billion in 2009, when the credit crunch was in full-swing.
Therefore, for long-term investors like me, shorter-term problems and challenges such as the Libor probe are not a major concern. What matters to me is that the bank is doing the right things to position itself for when an economic boom once again takes hold. When it does, profits of £10.3 billion are possible and shares are unlikely, in my view, to stay below £3 for long in those circumstance.
Secondly, although return on assets is often small for banks as a result of their vast asset base, Barclays looks to be on track to deliver return on assets of just under 0.5% in the current financial year.
Indeed, this figure should increase in future years from the combination of a planned shrinkage in net assets (announced at the same time as the rights issue) and a forecast increase in profitability.
Thirdly, Barclays still benefits from high barriers to entry, with the cost to enter the banking industry remaining prohibitively high. Such entry barriers mean high margins and, although there is now more competition than there was before the credit crunch, Barclays’ size and scale mean that it should be able to maintain relatively high margins — even versus more nimble and well-regarded rivals.
So, negative short-term sentiment from the Libor investigation means I’m thinking of adding to my shareholding in Barclays. I’m confident that pre-credit crunch levels of profitability will return, with return on assets being relatively attractive and high entry barriers providing a large degree of sustainability for margins.
