When I think of banking company Barclays (LSE: BARC) (NYSE: BCS.US), two factors jump out at me as the firm’s greatest weaknesses and top the list of what makes the company less attractive as an investment proposition.
1) Lack of earnings’ visibility
Modern banks like Barclays earn money in ways I can’t even imagine. Sometimes, when the truth comes out, as it has in one scandal after another in recent years, it leaves me wishing banks had never conceived those dodgy earnings’ streams in the first place.
Banks have moved a long way from the basic banking business model of yesteryear. The volatile blend of esoteric business practices, high gearing and accounts that look like a Harry Potter training manual in the dark arts, make earnings hard to predict for investors like me. That makes the company uninvestable in my book, unless there’s a very big discount to net-tangible-asset value and we are at the ‘right’ point in the general macro-economic cycle. That’s not now, in my view.
2) Poor cash performance
One way to judge the effectiveness of a business model is to follow the cash. Just about every cash measure in Barclays’ financial record seems to indicate a company that has been struggling:
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Cash at bank (£m) | 81,483 | 97,630 | 106,894 | 86,191 | 45,687 |
| Net cash from operations (£m) | 41,844 | 18,686 | 29,079 | (13,823) | (25,174) |
| Net cash from investing (£m) | 11,888 | (5,627) | (1,912) | (7,097) | (22,645) |
| Net increase/decrease in cash (£m) | 49,831 | 17,060 | 18,273 | (27,873) | (41,711) |
Barclays is engaged in root and branch reform of its business practices and a de-leveraging of its operations. Just like a retail investor who unwinds a massively geared spread-betting account, the result looks like being diminished capital.
Barclays seems set to emerge as a leaner, meaner and … smaller business going forward, which puts yet another question mark over the wisdom of an investment in Barclays now.
What now?
To me, banks like Barclays are less attractive than they were a few years ago, around 2009.
Banks can be such complex beasts to analyse that it’s hard to ensure that we are buying good value.
