The Motley Fool

Investment Banking Will Help Turn Around Barclays PLC

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).

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

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.


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.


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.

There’s a ‘double agent’ hiding in the FTSE… we recommend you buy it!

Don’t miss our special stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to read our presentation.