Qatar Holding’s stock sale imperils Barclays’ effort to close valuation gap
Barclays hopes to win over investors with new return targets and buyback commitments next February, but it really needs a revival in investment banking.
When you have just bought back £750 million of your own shares to get your stock price moving, it doesn’t help when one of your biggest and longest-standing shareholders promptly dumps £510 million worth back into an equity market where there appear to be more sellers than buyers.
News broke on Monday evening that Qatar Holding was selling down a 2.3% stake in the UK bank that it had famously propped up with a £7 billion investment back in October 2008.
The Qatar sovereign wealth fund saved Barclays from the fate of other UK banks that were nationalized in the global financial crisis and has stuck with it ever since.
But it has trimmed its ownership in the intervening years. And the latest sale comes at a particularly troubling moment for Barclays as it struggles to close the yawning valuation gap that has opened up against its peers.
Modest missteps can produce sizeable share price moves in a nervous market
Barclays can claim to have done well in the past three years, consistently earning a return on tangible common equity over 10%, putting it ahead of the average for large European banks. That is a step change – roughly double – from what it averaged in the previous five years from 2016 to 2020.
The bank has shown conservative risk underwriting and liquidity management while generating organic capital. And while the ouster of previous chief executive Jes Staley over misrepresentation of his relationship with Jeffrey Epstein was hideously embarrassing, as was the over-issuance of structured notes, it has more recently steered clear of litigation risk.
Sadly, for Barclays, however, everything is relative. And its UK rivals, HSBC, Lloyds and even NatWest are averaging above 15% RoTE on similar or higher capital levels.
Investors are not confident in European banks; even while Barclays has built tangible book value per share, it now trades at just above 0.3 times book, while its peers trade are at much tighter discounts.
Barclays has to do something.
That is why it quickly executed the £750 million buyback announced at mid-year and has guided that the priority for retained earnings will be to return these to shareholders even above investing in the business.
But investors are still jumpy.
After Barclays announced third-quarter results on October 24 showing a return on tangible common equity for the first nine months of 12.5%, the stock fell 9% on news that its management was trimming net interest margin guidance for 2023 to 3.05% to 3.1%. That is down from the 3.15% they had forecast at second-quarter results.
Modest missteps can produce sizeable share price moves in a nervous market.
The bank knows it must do more than buy back its own shares. It says it will take material structural cost cuts this quarter. These are meant to boost future returns but will come with an upfront hit this year. And these cost cuts have not been detailed, adding to uncertainty.
Barclays is asking investors to wait for an update on financial targets and pay-outs to be delivered with full-year results on February 20, 2024.
Qatar Holding, it appears, does not intend to wait.
The shares sold off again, by 4.5% on Tuesday morning as investors priced in the new supply.
Even though shares then recovered and ended Wednesday down just 2.5%, the gossip among rival equity capital market bankers is that Bank of America and Citi could not immediately place the whole block.
Berenberg analyst Peter Richardson rather neatly summed up in a note in October the challenge Barclays faces in closing the gap between acceptable performance and dismal valuation.
“Barclays continues to divide investor opinion," he wrote. "While few investors would characterize the bank as being best-in-class, a core group of investors believe that the bank’s discount to European banking peers is unwarranted.”
Barclays’ leaders appear to think that its business mix is right and that all they have is a communication problem.
Their real problem is that while some investors may pay attention to micro-management of published return targets, most are put off by the much bigger strategic question that has bedevilled Barclays for the entire 15 years in which Qatar Holding has remained invested.
Fully £219 billion of group risk-weighted assets are devoted to a corporate and investment bank that produced a 9.2% return on tangible equity in the third quarter of this year. Just £72 billion are devoted to a UK bank that earned a 21% return.
Expectations are building for some form of rebalancing away from the investment bank to be announced next February.
However, chief executive CS “Venkat” Venkatakrishnan and chief financial officer Anna Cross are not talking about any such strategic shift.
Barclays has been there and done that. Staley faced down activist Edward Bramson, who at one point owned a 6.1% stake in Barclays and campaigned for it to divest the investment bank before conceding defeat and bailing out.
The wisdom of this appeared when the UK retail bank lost money in the first years of the Covid panic and the investment bank boomed. Investors with short memories appear to have forgotten that while banking conglomerates do trade at a discount, they can also offer some stability.
There is the obvious danger for Barclays that merely confirming more precise or slightly higher commitments to returns, including dividends and buybacks, will inevitably look disappointing to investors next February.
A more relevant question for Barclays is not if it should be in investment banking, but whether it has the right kind of investment bank?
Barclays is once again trying to build up in equities and ECM, as well as in M&A: the capital-light investment banking businesses. It is yet another recurring theme. Barclays has been struggling to achieve this for a quarter of a century, ever since Martin Taylor – eight chief executives ago – sold the old BZW equities and corporate finance businesses to Credit Suisse.
This is not an easy process. Barclays was hit by widespread defections earlier this year when it promoted Taylor Wright and Cathal Deasy, relative newcomers from Morgan Stanley and Credit Suisse to co-heads of investment banking. Many bankers who had stuck with the firm since the acquisition of Lehman Brothers in 2008 left for rivals in disgust at what they saw as the mistreatment of previous co-head John Miller.
Venkat and Cross must hope that in 2024, we get a revival in investment banking and that falling interest rates may prompt deal-making, M&A, debt financing and equity raising.
If that happens, then investors may tentatively buy into the Barclays story again. But that is not in management’s control. In recent months we have had what Cross calls the wrong type of volatility: too little for markets traders to profit handsomely from; too much for corporate boards to consider deals.
If that persists, Barclays will once again face strident calls to cut its dependence on investment banking.