Why Barclays is a Buy

No position here. 30K feet view. Based on a sample set that includes comparable global banks with broadly similar strengths: JPM, BAML, Citi, Credit Suisse, UBS, BNP Paribas, Nomura, Deutsche Bank, HSBC, RBC and TD.  

Given the relatively long-time it takes for managements' actions to translate into top-line improvement (and eventually profitability and returns to shareholders), I see this more as a 24-36 month investment time horizon. 

Barclay's Return on Equity (currently at 10.5% and L5 Years at ~5.0%) has a lot of room to grow in comparison to the JPM (~16.9%, 12.3%), UBS (~12.4%, 8.1%), and BAML (11.8%, 8.8%). Obviously these ROEs are a function of many things, one of which is the segments that the bank operates in. 

Barclays' current Price to Tangible Book Value is ~0.53x, which is only slightly greater than Credit Suisse (0.5x) and Deutsche Bank (0.42x). However, the average ROE over the last five years for CS and DB has been a mediocre 1.1 and (1.0%), respectively. To drill deeper, CS has been experimenting over the last five years, its' focus has shifted noticeably from "investment banking and capital markets" to wealth management (~54% of top-line in 2016 to ~40% in 2021) and it has had management issues that have been in the news (I am not sure what will be the implications of this Archegos blow-up, so cannot comment on that), but its cost to income ratio has been completely whack (more recently at ~88% vs. average of 79% over L5). CS could definitely take some inspiration from UBS that trades at a P/TBV of 1.21x, and I believe the reason for that is its strong wealth management division. It's top-line from both IB and wealth management have grown at a CAGR of ~5.0% and 4.1%, respectively, but more importantly, the profit before tax from both divisions at ~9% and 21%, so clearly the UBS management knows what it should be prioritizing. UBS' wealth management makes up 54% of the top-line vs. 36% for CS, and I believe wealth management is where the growth will come from. Side point: UBS is well-positioned in Asia to take advantage of the growing wealth / increasing number of millionaires popping up. DB has had many problems that have been in the news, and so I am not going to spend time talking about it, but it is the only big German global bank in the "Premier League" and so I think that positions it well for those clients/corporates, who want that kind of exposure, but between CS and UBS, one could go with UBS. Wealth management is good, because there tends to be cross-pollination between wealth management and IB, and so I think a solid wealth management arm can benefit your IB division.   

I haven't really spoken about the Canadian banks here (TD and RBC) because they tend to be a bit more conservative, which is reflected in both their Cost to Income ratio (~40-45% mark) and Loans to Deposits ratio. They are also the only big enough Canadian banks that have a compelling enough growth prospects (with global ambitions), and so I think the valuation multiples reflect this. (average Price to Tangible Book Value of 2.4 to 2.6x).   

So all that said, what can Barclays do. This is what I like about it: 

1. Although they are predominantly IB focused (and this dates back to its acquisition of the Lehman franchise), their IB revenues have been broadly stable. There's been some volatility as one expects in this segment, but the top-line has grown at a CAGR of 3%, while retail has fallen by 2%. Retail is not where the growth will come from, so I think that's fine. The only customers who generally want to go into branches are the older generation, while the millennials and Gen Zs would prefer a strong digital presence instead (less hassle), which obviously bodes well for bank's overall profitability (less staff needed, less real estate foot print required). The experience of visiting a branch is always not-so-pleasant with a lot of time wasted. That said, Barclays' margins from its corporate and investment banking division (in which I include commercial banking as well) have gone up from 25% to 40% over the last five years. 

2. I feel that there is room for Barclays to improve its Cost to Income ratio, which is currently at ~60%, while the likes of BAML, Citi, and JPM are more in the 45-50% range (and so are the Canadian banks). Now obviously this high Cost to Income ratio is because of its predominant CIB franchise, where I imagine folks tend to better paid, but if it was to expand into wealth management that I think it has some presence in (albeit not significant), it would be able to cut down its costs AND grow top-line. It's tier 1 and total capital are on the higher end relative to the the three American peers I mention above, which would be because its overweighted to IB (that warrants a higher risk-weighted asset allocation).  A shift to wealth management would lead it to not have so much capital stashed up 

3. Barclays based on my initial read can improve its risk management system, and maybe it uses its balance sheet to win business that it might not be able to win otherwise. Its non performing loans (as a percentage of total loans) are much higher than the American, the two Canadian banks, and UBS. An average of ~2.0% vs. 0.5-0.8% for the rest; it's allowance for credit losses as a proportion of its NPLs also consistently pales (L4 year average of ~82% vs. 150% plus for the American and Canadian folks), which means that it is definitely underprovisioning -- something that the investor community would not appreciate as it leaves room for surprises to pop up. Also, I think that JPM and BAML can broadly show Barc that if it utilizes its retail or capital effectively, it can still do well. The two banks lend out a smaller portion of their deposits in the form of loans (~45-48% vs. on average of ~75-80% for Barc), but their net profit before tax for their retail and CIB segments have consistently been higher over the last five years      

4. Barclays can improve its segment disclosure, the way they segment their results makes this whole exercise complicated and gives the impression of them being opaque. Doubt that would be appreciated by the investor community.  

So for these reasons, I would be long on Barc. There's a lot that could be explored further here (quality of loan book, which geographies is it exposed to), but as I said, this is high-level, and since banks are mostly a macro-driven play, any macro event (unless it is super region specific) should impact each of them. I know Barc recently had a CEO change, which makes sense given the link to Epstien and all, but unsure at this stage of how good or capable the new CEO is, so I cannot make any judgement on it.

I do not work at Barclays or any investment bank for that matter, but I have spent some time in FIG in IB at a major American bank. This analysis is strictly based on Capital IQ, and I haven't gone through the process of scrubbing the numbers, but important to be consistent. I would also politely request any current IB analysts or Associates to not butt in with the usual WSO prestige comment (why isn't Lazard, Evercore, Goldman Sachs, Morgan Stanley on this list), as the answer is that I don't consider them to be comparable for this exercise.