UK Edition
Opportunities arise at times of crisis when investors sell every stock indiscriminately even when those stocks have markedly different prospects.
Banks are a good example.
All four of the big London-listed lenders have suffered steep share price falls since the virus crisis began. But one stands out as being much better able to cope with it.
That bank is Barclays and the reason it is different is that it has a large investment banking operation.
Hang on, you say: isn’t investment banking the very thing many banks have abandoned because it is risky, ties up a lot of capital and doesn’t make big returns? Barclays has even attracted the attention of a well known “activist” investor, Edward Bramson, who has put pressure on the bank to shed its investment banking arm.
All that may have been true but the virus has changed everything.
“Its investment bank is making hay right now,” said Richard Buxton, who has bought more of the stock for his Merian UK Alpha fund since the onset of the crisis.
Barclays has benefited from one of the big effects of Covid-19 on the business world: the sudden need among companies of all shapes and sizes to raise capital. Helping firms to do this is exactly what investment banks do.
“Barclays is currently raising a lot of debt and equity for companies,” Mr Buxton said. “This is helping to offset the damage done to its retail bank by coronavirus. The two arms of the business work to different cycles.”
He added: “At long last this ‘why bother with an investment bank’ argument is being disproved.”
Barclays is alone among British lenders as a significant player in investment banking. Lloyds and RBS abandoned it after the financial crisis and while HSBC does have an investment banking arm it is not on the scale of Barclays’. Likewise, the big European banks have quit the market.
“Barclays is now the only significant investment bank in Europe,” Mr Buxton said. “It is good that there is one European investment bank punching its weight.”
He said its American rivals had already reported results that showed how well their investment banking arms had performed during the crisis so far – companies’ need to raise new capital is not confined to Britain – and there was no reason to think Barclays wouldn’t follow the same pattern.
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Away from investment banking, Mr Buxton praised Barclays’ efforts to accelerate the shift to digital banking as part of its drive to improve returns.
“The market was sceptical before Covid about improvements in returns and things will be slower now,” he said. “But it has grasped the nettle and put massive investment into digital. People get excited about banking start-ups but Barclays has the scale. It has a cybersecurity tie-up with Lockheed – how many start-ups could do that?”
Mr Buxton said the bank had also avoided the IT problems that had plagued rivals such as TSB. “It carried out a big systems switch last year without a hitch,” he said. “The market is not giving it any credit for the amount of work it is doing to transform itself. Jes Staley, the chief executive, is always getting his phone out when you talk to him.”
Ultimately Mr Buxton said his decision to buy Barclays was driven by valuation. “The price you pay is key to your eventual returns,” he said. “And the bank is valued at about a quarter of its book value or the value of its assets.”
He said this type of discount reflected – ironically, in view of how its investment bank is making money at the moment – the fear among investors that Barclays itself might have to tap shareholders for new funds.
“The share price implies that bad debts brought about by the economic crisis will erode its assets to the point that it will have to raise new equity. But we are convinced this is not the case,” he said. “The market has said we don’t want to touch banks. It is being completely indiscriminate and giving Barclays no credit for the investment banking side: it and Lloyds have both fallen by about 50pc.”
He concluded: “But there is differentiation here. It’s my job to spot these anomalies and I think this is a real value opportunity.”
Questor says: buy
Ticker: BARC
Share price at close: 86.51p
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