Another day another banker told off and sent to the naughty step. This time it’s Barclays (LSE: BARC) (NYSE: BCS.US), for rigging gold prices. The Financial Conduct Authority has slapped a £26m fine on the firm for “failing to adequately manage conflicts of interest between itself and its customers as well as systems and controls failings, in relation to the Gold Fixing.”
The industry seems to have such propensity to misbehave and manipulate for gain, that it’s a wonder anyone would want to associate themselves with a bank by owning its shares at all.
Discount to assets
However, if you think it’s worth taking the plunge with banking shares, the best time to buy is probably when the share price is trading at a discount to the firm’s net asset value. That’s usually when the bank is near the low point in the general macro-economic cycle. Happily, at a today’s share price of 245p, Barclay’s shares are discounting the last-reported net tangible asset value of 284p by about 13%.
Superficially, that discount looks attractive, but it might just mean that the market thinks Barclays’s asset value will decline. The firm is reshaping its business model, which could lead to shrinking assets going forward. If we look at the most tangible of tangible assets, cash, for example, there’s a definite downward trend:
| 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) |
Looks grim, right? This leads to:
Turnaround potential
Before the gold-rigging scandal emerged, which introduces a note of irony, Barclays’ CEO said the bank is de-risking its business for reputation and conduct. So, sticking to what’s legally, morally and professionally right, will be the order of the day going forward. Hopefully, the firm can move beyond such past indiscretions as gold-price fixing, payment protection insurance miss-selling and interest rate hedging products redress.
Reform can be costly, as investors experienced with last year’s £5.8 billion dilutive rights Issue. High gearing meant Barclays had precarious finances and its Leverage Plan now aims to get gearing under control, as required by regulators. The implication is that lower leverage means scaled-back operations and thus lower profits. However, the fundamental nature of changes at Barclays gives hope that a better business will emerge, which seems to keep investors interested.
What now?
The forward P/E ratio is running at about eight for 2015, with forecasters expecting earnings to bounce back by a further 24% that year. The forward dividend yield is around 4.8% and covered more than two-and-a-half times by adjusted earnings. If Barclays wasn’t a bank, those figures would look attractive. However, as it is a bank, the inherent cyclicality of the industry inclines me to caution.
