9th May 2014
Analysts have rushed to upgrade Barclays (BARC.L) after news the high-street stalwart is shedding 19,000 jobs and creating a ‘bad bank’.
As part of a strategic shake-up the bank has said it will cut 19,000 jobs by 2016 – 9,000 of which will be in the UK and 7,000 of which will be in investment banking where business has slowed significantly.
Barclays has also said it will carve out a ‘bad bank’ that will house £115 billion of ‘non-core operations’, including £90 billion of investment bank assets and £16 billion of European retail operations. Instead the bank will focus on UK retail and its credit card business.
The news was welcomed by analysts who see the simplification of the model as a precursor to cost cutting within the business.
Investec analyst Ian Gordon said he was ‘indifferent’ to the creation of a bad bank and retained his ‘buy’ recommendation and a target price of 295p on the shares.
‘Barclays is already a low-risk, profitable bank, but [the strategic announcement] is about rightsizing the bank to reflect a smaller addressable investment banking revenue pool and to deliver improved and sustainable returns,’ he said. ‘The creation of a ‘bad bank’ is merely packaging. What does excite us is the emboldened commitment to deliver underlying costs of £16.3 billion by 2015 versus £18.5 billion in 2013, against reasonable revenue give-ups.’
Numis analyst Mike Trippitt upgraded the stock from ‘hold’ to ‘buy’ with a target price of 280p but said ‘in hindsight perhaps this was the restructuring that should have been announced in February 2013’.
Trippitt said the split between core and non-core assets would allow Barclays return on equity to be calculated more ‘cleanly’ and the core business is expected to be backed by core tier one capital of over 11%.
While Barclays shares have gained around 5% since the strategic update, it is not the only company that will benefit.
UK debt buyer Arrow Global (ARW.L) could be a winner from the creation of a bad bank as Barclays has not ruled out selling off the bad assets.
Numis analyst James Hamilton upgraded Arrow Global from ‘add’ to ‘buy’ as he predicts its business model will benefit from the Barclays’ assets.
‘Having spoken to Barclays they confirmed they would be happy to sell opposed to letting these assets run-off,’ he said. ‘Given Arrow’s existing relationship with Barclays we believe there is the potential for a possibly substantial acquisition…We believe the Barclays bad bank evidences the scale of opportunity in the debt purchase market.’
He added that recent weakness in the Arrow share price provided another reason for an upgrade.