Buy into Barclays' restructuring

In May new chief executive Antony Jenkins announced a "bold simplification of Barclays". He intends to hive-off non-core assets - hence the Spanish exit - and downsize the volatile investment bank. The objective is to focus Barclays on its UK retail and corporate operations, as well as its African business. His plan for shrinking the investment bank is especially ambitious. Headcount there will fall by 7,000 and Barclays established a non-core bank where £115bn of assets (weighted for risk) were parked with the intention of running them down to around £50bn by end-2016. Significantly, 80 per cent of those non-core assets came from the investment bank.

Costs, too, are in Mr Jenkins' sights. He has reduced the bank's cost base target for 2014 and 2015 by £0.5bn in both years to £17bn and £16.3bn, respectively, and core costs should drop to under £14.5bn for 2016. That said, with underlying costs having reached £18.7bn in 2013, delivery will be challenging. Indeed, banking analyst Shailesh Raikundlia of Espirito Santo Investment Bank said at the time the targets were announced that execution "remains the key risk".

If successful, however, the impact of the restructuring should be profound. That's because the core businesses are already performing well and delivered an 11 per cent return on equity at the half-year stage. Include non-core operations, however, and the half-year return figure drops to 6.5 per cent. So exiting those poorly-performing non-core operations quickly, combined with cost-cutting, should bolster earnings significantly.

Another boost will come as a consequence of economic recovery. The IMF expects the UK's economy to grow by 3.2 per cent in 2014, which should drive robust demand for credit and, in turn, bolster earnings growth. That backdrop is delivering a rapid improvement in credit quality, too - so profits won't be consumed by bad debt provisions - and the impairment charge at the half-year stage fell a third to £1.1bn. In fact, between end-2013 and end-2016 broker Investec Securities expects earnings to have risen over sixfold to 24.7p a share.

True, headwinds from misconduct-related issues persist. Most notably, the bank booked a further £900m provision at the half-year stage to cover compensation claims for payment protection insurance mis-selling. Last year, Barclays also set aside £1.17bn to cover redress for having mis-sold interest rate products and further charges aren't impossible. After 2012's £290m fine for its part in Libor-rigging, misconduct worries continue to hit sentiment as well. In June, for example, the shares slumped around 8 per cent on news that New York's Attorney General had filed a lawsuit relating to the bank's 'dark pool' trading operations. That allows blocks of shares to be traded while keeping prices private and it's alleged that Barclays favoured higher-frequency trading clients.

The capital cushion could look healthier, too. True, a £31bn fall in risk-weighted assets at the half-year stage (£22bn from the non-core bank) did help boost Barclays' Basel III-basis common equity tier-one capital ratio (comparing its highest-quality capital with risk-weighted assets) by nearly a percentage point to 9.9 per cent. But both HSBC's (HSBA) and Lloyds' (LLOY) ratio is in excess of 11 per cent and even RBS managed a 10.1 per cent ratio.