Why A Leaner, Meaner Barclays PLC Is Great News For Investors

As I’m sure some of my fellow Fools will agree, losing weight can be tough.

As someone who has been on his fair share of diets, I can confirm that it is certainly short-term pain for long-term gain! However, it is well worth it once the weight has been banished.

Indeed, something akin to a financial diet is something that, it appears, the banking sector is in dire need of, according to research released by RBS. It says that Europe’s largest banks need to cut €661 billion of assets from their balance sheets and raise around €47 billion of fresh capital over the next five years.

If they don’t, they will struggle to comply with regulations aimed at reducing the likelihood of another taxpayer-funded bailout.

Interestingly, Deutsche Bank, Credit Agricole and Barclays (LSE: BARC) (NYSE: BCS.US) were singled out as the worst offenders. Indeed, the entire sector (including smaller banks) needs to shed €3.2 trillion of assets by 2018. Clearly, the sector is not out of the woods just yet.

Barclays, of course, recently announced plans to conduct a £5.8 billion rights issue, with the company aiming to remove £65 billion – £80 billion from its asset base too.

Despite this action, it highlights the fact that even five years after the credit crunch, Barclays is still struggling to tread water on its own, with shareholders again being asked to do their bit to put the company on a firmer financial footing.

However, I feel that all of the above makes Barclays an even more attractive investment.

For starters, the above-mentioned points are already priced-in. So, unless Barclays has got its numbers wrong and needs to come back to shareholders cap in hand yet again, then this round of fundraising should be enough to set it on a more stable financial course.

Any positive developments, particularly with regard to the announced asset sales, and shares could enjoy a bounce.

Indeed, the downbeat news flow surrounding the sector seems to be reflected in Barclays’ valuation. It currently trades on an adjusted price-to-earnings (P/E) ratio of 8.3, which compares favourably to the wider financials sector and the FTSE 100. They have P/Es of 19 and 15 respectively.

In addition, Barclays currently yields 2.5% but has said it will increase the payout ratio to between 40% and 50% of earnings. As such, dividends of 11p per share are expected in 2014, giving a yield of 3.8% at the current share price of 290p.

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> Peter owns shares in Barclays.