“The investment management unit of Barclays said it appointed James Buchanan-Michaelson as general manager of Barclays Bank (Suisse),” Reuters reported on Wednesday.
That was apparently the most relevant headline news on Barclays last week.
Of course, the shares of Barclays (LSE: BARC) (NYSE: BCS.US) did not rise almost 4% at one point on Wednesday simply because Mr Buchanan-Michaelson was appointed!
Well, the bank also named Jonathan Eckard as a senior equity research analyst, it emerged on Tuesday, while on Monday an insider bought £12,000 worth of shares — but it’s not even that!
So, what did it happen behind the scenes?
Brokers, Always Blame Them
On Wednesday, Morgan Stanley raised its price target for Barclays to 333p a share from 315p (+5.7%) — and that’s why the shares rose.
I had a long conversation with a London-based broker earlier this week, who suggested that Barclays could deserve a significant premium versus a few other investment banks, such as Deutsche Bank.
That view is based on the two banks’ relative valuations, which are pretty similar. Furthermore, Deutsche Bank, which has rarely traded at a premium versus Barclays, “has more stock of provisions for litigation at $3.6bn vs $2.6bn at Barclays, but Deutsche Bank has not settled for the Libor,” a second source noted.
In short, Barclays (+2% in 2015) is a much more appealing proportion than Deutsche (+30% this year), I was told.
A More Resonable Scenario?
Undoubtedly, Barclays has been boosted by upbeat reviews from analysts. A few European brokers have pencilled in a price target in the 250p-270p range, while most American brokers suggest Barclays could be worth more than 300p a share.
My source acknowledged that the market may be too bullish: “EPS growth forecasts are based on GDP expectations, and those are insanely high,” he noted, adding that a 220p to 230p price target is possible, if things do not go according to plans, but that would imply a significant drop in risk-weighted assets.
Currently trading at 252p, I think downside for Barclays could be greater than 15%. I factor in additional provisions for losses and litigations as well as goodwill impairments and lower returns in its investment banking unit — and, why not, a few downgrades from brokers in months ahead!
On top of the redundancies that have already been announced, the good news is that big job losses seem inevitable in investment banking at Barclays. As the investment risk associated to this British bank heightens, however, you’d do well to consider alternative investments — such as HSBC, for instance.
