The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Aimee Donnellan
LONDON, Oct 24 (Reuters Breakingviews) - Barclays’ BARC.L investment bank reboot is showing signs of life. On Thursday, the $46 billion UK lender revealed that its debt and advisory businesses are performing well. If CEO C.S. Venkatakrishnan can keep it up, he has a chance at resuscitating the bank’s dismal valuation.
Venkatakrishnan, known as Venkat, has a few reasons to cheer. Barclays’ investment bank, from which he is attempting to squeeze higher returns, is firing on some of its cylinders. Overall, the unit reported income of 2.9 billion pounds, a 6% rise versus the same period last year. The bank’s debt capital markets unit was the clear star. Total income in that division increased by 48% to 344 million pounds in the three months ending September.
The results partially vindicate Venkat’s plans for the investment bank, which is less profitable than the rest of the group and absorbs too much capital. Earlier this year, he promised to cap the investment bank’s share of risk-weighted assets at 50% of the total. Meanwhile co-heads Taylor Wright and Cathal Deasy are hoping to spruce up returns by focusing on advising clients and underwriting equity issues and becoming less reliant on the more capital-intensive debt business. The more than doubling of income from advisory services is a good start.
There’s a long way to go. Barclays is still leaning heavily on debt markets for growth. And while the 3% year-on-year growth in equity capital markets business in the third quarter is positive, it lags U.S. rivals like Citigroup C.N, JPMorgan JPM.N, Morgan Stanley MS.N, Bank of America BAC.N and Goldman Sachs GS.N which grew their units by an average of nearly 27% versus last year. Moreover, the investment bank still generated a mediocre return on tangible equity of 10% in the three months to September, which is far below the group average of 12.3%.
The long journey ahead means investors aren’t yet giving Venkat much credit for the turnaround. Barclays' shares are worth just half of its book value, less than British peer Lloyds Banking Group LLOY.L on 0.9 times, and a big discount to U.S. rival Morgan Stanley on 1.8 times book value. Unless Venkat can keep delivering consistently, his bank’s valuation will remain in the doldrums.
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CONTEXT NEWS
Barclays reported on Oct. 24 an 18% rise in third-quarter profit, and said slower than expected interest rate cuts and improving investment banking prospects would support revenues.
The British bank reported pre-tax profit for the July-September period of 2.2 billion pounds ($2.85 billion), up from 1.9 billion pounds a year ago and higher than the average of analysts' forecasts of 1.968 billion pounds.
The lender upgraded its forecast for net interest income for 2024, saying it now expects to exceed 11 billion pounds rather than just hit that target.
Barclays said third-quarter income in its investment bank rose 6% year-on-year, a strong performance that exceeded expectations but lagged gains at some U.S. and European rivals.
Shares in Barclays were up 3.17% by 0808 GMT on Oct. 24.
Barclays' shares are still lagging US peers https://reut.rs/3YBkQKM
(Editing by Neil Unmack and Streisand Neto)
((For previous columns by the author, Reuters customers can click on DONNELLAN/Aimee.Donnellan@thomsonreuters.com))
