Barclays profits up but is it an attractive investment opportunity?

27th July 2012

There's no doubt that Barclays investors are right to want a fresh start. Questions over its strategy and ongoing search for a new chief executive in the wake of the Libor-manipulation scandal are still hanging over the bank. Fierce criticism was sparked following the scandal over the bank's culture and risk-taking, and now it's considered that what Barclays does to rebuild its brand and restore shareholders' confidence is more significant than the results.

So while champagne corks pop across London as it hosts the opening ceremony of the Olympic Games, the mood in Canary Wharf may be less upbeat as investors wonder what lies ahead for Barclays' future.

So what does the future hold?

Investors are keen for one or both of the new CEO or chairman to come from outside for a revamp of the way things are managed.

After all, for all his achievements, Mr Diamond created a Barclays that never quite gelled with the City. Investors and analysts were suspicious, regulators distrustful, and the world at large often openly hostile to the investment banking leviathan that he rendered inside one of Britain's oldest and most respected lenders, says the Daily Telegraph.

Former J.P. Morgan banker Bill Winters is favourite to be CEO and former UK Cabinet Secretary Gus O'Donnell is front-runner for chairman, according to industry sources and UK media reports, reports This is Money.

But important as pay protests and boardroom change are, there is a more fundamental campaign investors should be waging – to force banks to face up to the new order of things imposed by a weaker economic outlook and a tougher regulatory landscape, argues the Financial Times (paywall). The truth is most of the world's banks are too big and should be broken up.

However, clarity on the strategy is unlikely until the bank appoints a new CEO. On who the public want, Antony Jenkins should be the next CEO of Barclays, according to a poll of Mindful Money readers.

And what does this mean for investors?

Kevin Murphy, of Schroders and a Mindful Money blogger, says: "The day Barclays' fine was announced, the bank's market capitalisation fell some £3.5bn – more than 10 times as much as the fine. This was an emotional reaction by the market, which was essentially giving up on banks as almost uninvestable.

"And yet, over the last three or four years, the banks have been making some steady progress. It may often have felt like two steps forward and one step back – and occasionally like one step forward and two steps back – but they have repaired capital, improved profitability, jumped through all manner of regulatory hoops and endured a great deal of political scrutiny – not least as a result of the report from the Independent Commission on Banking.

"That political scrutiny, which now looks set only to grow even more intense, appears to have been the last straw for the market, which feels it cannot invest in banks because of the associated headline risk. But while headline risk can be deeply uncomfortable – for investors as much as for those making the headlines – it is unlikely to affect whether or not Barclays is a good investment.

"All sectors and all businesses carry headline risk, all the time…These things are part and parcel of being in business and, as often as not, can present those taking a longer-term view with opportunities to invest rather than be wiped out."

Whether Barclays is a good investment going forwards comes down to its fundamentals as a business, balance sheets and the valuation at which its shares are bought. This will all be affected by what happens to its structure and management team in the near future.

And with even former Citigroup chief executive, Sandy Weill, admitting that breaking up big banks might be quite a good idea, it seems that questions over the shape of Barclays will not go away.

Nowhere is the crisis of confidence in banks clearer than Barclays, so it'll be fascinating to see how it shifts this shadow.


More on Mindful Money:

Mindless With Money: How to be a mindful investor

Can behavioural psychology convince companies to stop ‘stashing the cash’?

Rare earths – the elements of a new investor danger

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The Financialist

27 thoughts on “Barclays profits up but is it an attractive investment opportunity?”

  1. Joe says:

    Great analysis as ever Shaun.
    So, four-five years on and we’re no closer to a ‘classic’ recovery – when is it going to be clear to those in charge that we’re not going to get one this time? Going by the last quote, they’re resorting to deliberately creating artificial bubbles, and as you point out, even if they work, they’re simply going to burst!
    The poor wretched can has been kicked and kicked, how much further can it go? Added to that, each time we catch up to it, it’s bigger than before!

    Of course, with the likes of the Ponzi scheme of pensions (pay for today’s pensions with today’s tax receipts), there’s not much choice in assumed direction. If we don’t keep growing, then we can’t afford tomorrow’s bills!

    1. forbin says:

      becareful of WHOs government pensions you are talking about

      Local government is fully funded ( possibly now all in QE funny money ) not from taxation

      Westminster Pensions maybe , and my so called pension – the State one – yes thats taxation based

      Watch out for a Post Office type of raid on Local Gov. pensions in the future – where there’s gold…..


      1. Anonymous says:

        Hi Forbin
        Before I became Notayesmaneconomics I had a spell where I tried to mount a campaign against MPs pensions. You see they voted themselves a substantial increase a decade ago which was relatively obscure unless one understood the minutae. Sound familiar? Anyway in return for this they paid what I argued was a pittance rather than something approaching the true value.

        I didn’t know how near I was did I?

        Anyway after arguing with the Leader of the House who was then Harriet Harman on the subject I spotted a couple of years later that £30 million had gone into the MPs scheme because it was “underfunded”

        A shameful event but my point is I doubt whether that scheme will be allowed to be underfunded for any length of time!

    2. Anonymous says:

      Hi Joe

      Thank you. Actually my contention is that those in charge whether wittingly or unwittingly are taking us further away from a “classic recovery” as mechanisms like a fall in house prices are blocked. I have been involved in a twitter exchange over the past 24 hours with Adam Posen who used to be on the MPC and breathtakingly he argues this.

      “With the right multiplier on fiscal, as I did in real time, and allows for euroarea, UK GDP forecast right”

      Why breathtakingly? Well there are several posts from me pointing out his mistakes which I summarised in this tweet to him.

      “Your time at the BOE MPC was littered with you making incorrect inflation forecasts Adam.”
      In a way there you have it, however much events prove them wrong some people are capable of reinventing them in their own minds and concluding that they were right….

  2. Andy Zarse says:

    Hi Shaun, was the Washington Post correspondent called Punxsutawney Phil by any chance?

    There’s little to argue with in your UK analysis so far as I can see. Add this to the failure of official policy to ‘rebalance’ the economy, the lack of reform at the banks, more regulatory failure and the pound’s devaluation by 25%, we see there has been virtually no growth and it’s a pretty poor state of affairs all round. No wonder the stock market is up so far this year!

  3. MickC says:

    Your analysis is spot on.
    The property market is broken because no-one can afford mortgages. No amount of industry hype can avoid that simple fact.
    The high end London market does not depend on the “ordinary” buyer-and so will continue upwards.

    1. Anonymous says:

      Hi Mickc
      Our political class ( I do not think which party is in power matters much here) has decided that they will resist house price falls. Apparently keeping house prices as high as possible makes them “affordable” or rather with all their schemes they try to claim that.
      But what we need is house price falls which whilst unpleasant for house owners will start to make the market more affordable for buyers and kickstart things. Thats one of the ways economic recoveries start and why we have not had one….

      1. JW says:

        Hi Shaun
        Yes but you know what would happen with a sizeable house price correction, banks and a lot of the non-banking financial sector would have to fess up to its bad debts. Could the UK do what the US did in 2009/10? If not there would be a financial melt down. Maybe no bad thing, but civil strife could result. And the US experience does not demonstrate that the house price falls stimulate the economy, as the psychological effect on the majority is for them to react negatively to the apparent fall in household wealth. Unless real incomes , and real jobs are created simultaneously , it could be a lot more pain for no reward. I do not support our ‘zombie’ state , but the alternatives are not easy to find. The logic of our ‘western’ position of continuing decline in face of globalisation, demographics and robotics is not easy to deal with.

        1. forbin says:

          JW – indeed this is the fear that drives them! The banks are indeed broke – have not been fixed and at this rate – never fixed

          I think you’re right in thinking that the TPTB don’t know what to do – what can the priests do when their god deserts them?

          change religion ? think they might be wrong ? heh! fat chance

          we’ve had the latest wheeze with Cyprus banks – that tax levy – didn’t go down too well

          the Iceland expirement seems to working well but you can’t apply that to any country in the Euro Zone

          you have to leave it first – and theres no way any one is going to get out of the Euro alive!



          1. Noo 2 Economics says:

            “you have to leave it first – and theres no way any one is going to get out of the Euro alive!” and that gives me an idea for a
            musical suggestion for the PIIGS – Five to One by the Doors:

            Five to one, baby
            One in five
            No one here gets out alive, now

            Delivered by the European Commission and the ECB!

        2. Justathought says:

          Hi JW,

          Doctor Albert Barlett demonstrated long ago where we are heading…

          1. forbin says:

            mandatory for all politicos that go on about growth – indeed anyone who talks endless growth

            well they have too

            their answers don’t work otherwise – then where would we be ?


            Ps: can we really have steady state economics?

          2. Justathought says:

            Hi Forbin,

            History teaches us that after, the black plague which wiped out an estimated third of the European population sprung the “Renaissance”… roots from our western modern societies…

            The “crisis” we are passing through is only the symptom of the underlying cause…overpopulation within our western civilisation…

            To quote Dr. Albert Barlett:” You cannot sustain population growth and you cannot sustain growth in the rate of consumption of resources in a finite resourced world….it is not debatable!

            So optimistic…you bet I am! Maybe not in my life time but my children and grandchildren will have a brand new world model to create and enjoy!

          3. JW says:

            Hi Justathought
            Yes I saw these sometime ago. Gratifying that it was a Physicist that spelled out an ‘obvious’ truth.

            Re Forbin’s question below, I don’t think ‘steady state’ anything is possible ( again as a physicist speaking). No growth leads to decline, entropy works everywhere on everything. Entropy applied to human society would imply a quickening pace towards Shaun’s ‘Dune’ world of a small elite with maximum information and a declining mass denied information. Its possible to see modern technology including something like the internet as promoting this situation rather than as some have hoped, broadening the information base. The majority don’t want to ‘know’ what they don’t want to know.

  4. Nemesisforpredators says:

    Dear Shaun,
    you conclude revising Abraham Lincoln :
    “Government of the banks,by the banks,for the banks”

    I would add quoting Andrew Jackson in 1834 :
    “…you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. … You are a den of vipers and thieves.”

    Presumably, between the lines, these include their revolving doors with politicians and big business, their bonus and salary thievery and their hidden offshore activities currently being exposed ?

    Does that mean you at last actually agree that all this has been long-term planning (some would call it a “plot”) of the banks by the banks for the banks? As you conclude also : When,when,when will we ever learn?

    Thank you for your courageous, transparent and explicit analyses. I hope you have a good bodyguard.

    1. forbin says:

      I’ve often quoted the line

      Government of the people by the banks for the banks

      and yes, I believe them and the people who support them – to be vipers and thieves ! apt I think

      I guess we can always for ourselves see events that mark out the change – from the large concrete blocks out side our representative parliament to keep ” bombers” away but really were to keep protesters away from their poor ears – to the Great Gormless Brown ” saving the world” ( meaning banks- aren’t they the world? ) – to renaming the poor as “precariat” ( winscale to sellarfield )

      I believe the late George Carlin hit the nail on the head – you can choose what type of coffee you can have or what colour your shirt is – but the real important decisions are not yours to make

      so I eat my popcorn and watch – I wasn’t lucky enough to get the USA front seat in this freak show but I’ll watch from the Stalls …..


    2. Anonymous says:

      Hi Nemesis

      I like this line “You are a den of vipers and thieves.” It is true nearly two centuries later.

      1. Nemesisforpredators says:

        And furthermore, if it has all been a long-term “plot” by the establishment in the pay of the banks for the banks, should we not wake up and realize that it amounts to a monstrous collective betrayal of the public trust? A deliberate cold-blooded destruction of democracy?
        Otherwise known as a coup-d’état?
        What else would it take to wake us up? The total collapse of the world financial system? We are actually in the process of bringing that total collapse upon ourselves and betrayal of our children by our collective selfishness and blind indifference.
        And cowardice. After all our ancestors and parents sacrificed to give us peace and liberty – shame, shame on us all.

    3. Anonymous says:

      Hi Nemesis
      You last sentence is very reminiscent of what I said to a friend of mine who has plans for dealing with some of the corruption in Ghana!

      1. Nemesisforpredators says:

        I never said it was limited to the UK. After the recent and ongoing exposures of bankster and politicians’ behaviour the condition is clearly worldwide. What unites them is love of money. And it equally divides us. So we have invited these monsters to divide and rule us. The new home-grown self-inflicted colonialism. A lovely poisoned inheritance for our children. We should be repenting in sackcloth and ashes. Instead we’re sticking our stupid heads deeper in the sand.

  5. Anonymous says:

    BBC’s Peston complaining of HBOS banker bashing getting short shrift from public comments. RBS action groups (ESI/NCB pension trustees) commencing legal action are these straws in the wind ?
    With 2015 election looming will HMG start to yield to public pressure over the banksters – we can live in hope!

    1. Anonymous says:

      Hi Chris

      I did see the Robert Peston article and found his arguments to be simply shameful. I do recall that he has consistently operated in such a manner about James Crosby and wonder if the fact that the man Peston wrote a fawning and admiring biography of ( Brown’s Britain) praised and enobled Crosby is the cause of this. Even worse of course one of the banking arch-criminals Crosby was put on the board of the Financial Services Authority.

      So I conclude that these are traces that Robert Peston prefers not to be kicked over and therefore he prefers justice not to be done!

      Just to be clear these are factual rather than political points as my effort to keep politics out here here goes on….

  6. Justathought says:

    Hi Shaun,

    Spot on as usual,

    The internet is probably the best available invention that one can have access to, (when the wheat from the chaff is separated) we are left we extraordinary gifted observers such as yourself and we learn more than one could have imagined. On behalf of the group of people that I interconnect with and myself thank you for your insights.

    From a financial crisis passing by an economic crisis mixed with political crisis moving toward a “moral” crisis and soon an energy crisis, we might consider that we are heading toward “la totale” (the whole or the full one). We might still have a couple of years to prepare and organise ourselves however after 2015/16 all hell might break loose.

    Better prepare than feel sorry while expecting to be wrong…

    To quote Benjamin Franklin: “Those who give up their liberty for more security neither deserve neither liberty nor security”.

  7. JW says:

    Hi Shaun

    Its a ‘demand’ problem. With squeeze on real income levels demand for small/medium business ‘products’ falls, deleverage rather than remortgage. As remarked before, psychology of consumers no longer supports ‘conventional’ economics, the model is broke.

    Return to feudalism as you forecast.

  8. JW says:

    Hi Shaun

    Two very illustrative reports on ZH today re the US ’employment’ figures. My guess is the pattern so clearly shown here is replicated in the UK and elsewhere, which goes a long way to demonstrate the underlying reasons for lack of demand along with real income falls for those in work.

    1. Anonymous says:

      Hi JW

      That US employment report had elements of deja vu did it not? As we have discussed many times there are some signs of improvement but far fewer than the mainstream media would have you believe.

      I spotted some numbers which put the US participation rate back to what was until the credit crunch regarded as normal and they calculated US unemployment at 11%! Ooops…

      For those who have not followed this debate unemployment numbers are not as clear cut as you might think and one particular feature has been the way in the US that the participation rate has fallen which flatters the numbers by up to 3.4%. As you can see 7.6% or 11% is very different…

  9. Nemesisforpredators says:

    Dear Forbin,

    Your position : “but the real important decisions are not yours to make” is the very root of our problem. It is a suicidal abdication by the people, like lemmings, from their own collective wellbeing. This is due to individual selfishness resulting in several generations’ abandonment of our rich heritage, seduced by love of money.

    Another quote : “The wicked will be turned into hell, all the nations that forget God. For the needy will not always be forgotten, nor the hope of the afflicted ever perish”. Proverbs 9:17-18

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