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Bank of England governor Andrew Bailey this week told university students that the low valuations of UK banks puzzles him. Though better capitalised than ever, shareholders refuse to pay anything close to book value for them.
Next week, Barclays boss CS Venkatakrishnan — known as Venkat — must offer a plausible fix for this at the bank’s first strategy overhaul in almost a decade. If communicated poorly, as Société Générale’s Slawomir Krupa discovered in September, the event could cause more harm than good.
One overarching problem has been what to do about Barclays’ risky investment banking exposures and the resultant volatile earnings, which weigh on investor minds. Yet the division can at times offer complementary sources of revenue for the group.
Expect Venkat to offer four approaches to this conundrum. First, a more detailed financial breakdown of investment and consumer banking. Next, he is expected to confirm cost cuts of about £750mn. He will probably increase the bank’s targeted return on tangible equity by 100 basis points to 11 per cent for 2025. Finally, expect some clear cash figures for shareholder capital returns to come.
But he may need more than these tweaks to stem a three-year streak of share price underperformance. Its 50 per cent market value discount to book value is far greater than those for local rivals Lloyds and NatWest.
What the market really wants is a firm pronouncement on the future of investment banking. On this he has vacillated recently. Venkat recognises a need to rebalance the group’s businesses. But Venkat has also said he is reluctant to cut back, confusing the market.
More likely, he will restrict new capital to investment banking, redirecting any surplus to shareholder returns and more less-capital-hungry lending businesses. Acquiring Tesco bank for £600mn last week, which boosted UK unsecured lending exposures, offers a hint of this shift.
Even without added capital, the investment bank can produce more profits. This unit generated one of the lowest ROTE’s among European banks last year. That lower ROTE may be due to less income productivity and lower leverage relative to peers, thinks Jason Napier at UBS.
Barclays also talks about plans to shed less profitable clients as another source of higher returns. That sounds like more tinkering at the margins. Whatever Venkat comes up with later this month his shareholders will be looking for one thing: firm commitments that translate into higher shareholder returns, and soon.
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