Barclays (BARC), it seems, is finally shedding former chief executive Bob Diamond's investment bank-focused legacy. Mr Diamond was an investment banker to his core and, after 2008's acquisition of Lehman Brothers, he sought to turn Barclays into "the premier global investment bank". But following horrific first-quarter results - which saw investment banking total income slide by a painful 28 per cent per cent year-on-year - new boss Antony Jenkins has decided to wield the axe.
He intends to scale back the investment bank by hiving-off non-core assets - leaving the bank far more focused on UK retail, corporate business and its African operations. "This is a bold simplification of Barclays," explains Mr Jenkins. "We will be a focused international bank, operating only in areas where we have capability, scale and competitive advantage." Sure, strategic change had been expected and most analysts had anticipated the investment bank to be the main target. Nonetheless, the scale of Barclays' plans shouldn't be underestimated. After all, the group plans to shed 14,000 jobs in 2014 alone, or 10 per cent of its workforce. That's 2,000 more than flagged with its full-year results and 2,000 jobs will go in the investment bank this year, with another 5,000 redundancies at the division by 2016.
Even more eye-catching is the scale of the planned shrinkage to the bank's assets - described by banking analyst Shailesh Raikundlia of Espirito Santo Investment Bank as "bolder than we anticipated". Specifically, Barclays will establish a non-core bank where £115bn of assets (weighted for risk) will be parked with the intention of running them down to just £50bn by end-2016. Crucially, 80 per cent of those non-core assets will come from the investment bank - reducing the unit to "30 per cent of group capital consumed from 51 per cent [now]," estimate analysts at Deutsche Bank. This will see Barclays effectively withdraw from significant areas of its fixed income, commodities and trading operations - businesses that have suffered significantly amid interest rate uncertainty connected to the 'tapering' of the US quantitative easing programme. Indeed, downsizing plans for Barclays' European retail and non-UK corporate businesses look modest by comparison.
The impact on performance should be significant. That's because Barclays' core operations are already doing well and delivered on the bank's targeted 12 per cent return on equity (RoE) in 2013. So quickly exiting the struggling non-core operations - estimated by Barclays to represent a drag on RoE of around 3 per cent - should bolster earnings. That will also be supported by a much improved cost focus. Barclays has lowered its cost base target for 2014 and 2015 by £0.5bn in both years to £17bn and £16.3bn, respectively, and expects core costs to drop to under £14.5bn for 2016. Admittedly, and as Mr Raikundlia points out, execution of these cost cuts "remains the key risk", but analyst Ian Gordon of broker Investec is convinced that the action on costs is "real and structural".
Another factor to consider is Barclays' capital adequacy which, at present, isn't really so healthy. Its Basel III-basis core tier capital ratio is currently 9.6 per cent - only marginally better than RBS's (RBS) ratio and more than a full percentage point behind that of HSBC (HSBA), Lloyds (LLOY) and Standard Chartered (STAN). But that should change. First, shrinking non-core assets should see net risk weighted assets for the group fall by around 8 per cent overall, bolstering the bank's capital ratio in the process. But earnings growth will also help and, taken together, Barclays estimates that its Basel III tier-one ratio will improve to a solidly healthy 11 per cent by 2016. According to Deutsche, that even "looks conservative", while Mr Raikundlia thinks such deleveraging will mean "capital concerns are no longer an issue for Barclays".
Taken together, Mr Raikundlia estimates that Barclays' plan could see core earnings grow at least 20 per cent by 2016 to 36p. That leaves the shares - at 260p - trading on just seven times 2016's core earnings for 2016, compared to a European peer group rating of nearer nine times. They also look cheap compared to book value and trade at just 0.8 times Espirito's 2014 tangible book value estimate, whereas those of UK rival Lloyds trade at nearer 1.5 times. "As we have witnessed with Lloyds, investors are willing to reward banks that can demonstrate a sustainable path to returns above the cost of equity," notes Mr Raikundlia. Unlike Lloyds, however, Barclays pays dividends - its prospective yield for 2014 is around 3.5 per cent.
