What Will the “New Normal” Look Like for Barclays?

The scandal over the rigging of LIBOR rates has claimed its first major victim – Bob Diamond, the CEO of Barclays (BCS.N) – and investors are left wondering what the bank is worth in his absence.

Bob Diamond was, for many years, a key asset for Barclays (BCS.N), helping to steer its investment bank through the stormy waters of the financial crisis in 2008. Later, correctly identifying the public mood of outrage at the banking bailouts, Diamond took a stand, setting out standards for good corporate citizenship on the part of banks in the post crisis world. On the one hand, he argued, banks “serve a social purpose and meet a real client need.” But they also need to keep their hands clean. “The evidence of culture is how people behave when no one is watching.”

Alas for Diamond and Barclays, his own institution failed to live up to those lofty standards, as detailed in this recent e-book published by Reuters Breakingviews, which surveys Diamond’s rise within the institution and his precipitous fall from grace. As the book’s editor concludes, even now that Diamond is no longer at the helm, the bank’s fate – as a single behemoth entity or split into two – likely will be a bellwether for the banking industry worldwide.

A more immediate question for investors in Barclays is what lies ahead for the company’s revenue, earnings and share price. Last year, the bank generated a return on equity (ROE) of only 6.6%, compared to its cost of capital of 11.5%. That gap is far too large for investors to be comfortable with for long. Even so, as the Breakingviews calculator below shows, the bank’s stock price currently hovers at a 38% discount to those of its major rivals, all of whom are grappling with similarly depressed. While you try to gauge what a “normal” Barclays, no longer grappling with the aftermath of the LIBOR investigation, might look like, you may also want to ponder some of the valuation issues raised by the Thomson Reuters’ StarMine models.

The StarMine Value-Momentum (Val-Mo) model is a particularly robust stock ranking model, combining as it does two valuation models (StarMine Intrinsic Valuation and StarMine Relative Valuation) and two momentum models, the StarMine Analyst Revision Model (ARM) and the StarMine Price Momentum model. Currently, Barclays scores a remarkable 100 on this measure of a company’s outlook and prospects, the highest possible score. Barclays stock currently is trading at around $9.34, compared to an estimate of intrinsic value that is closer to $49.33 a share. That low market price implies that Barclays’ growth will actually shrink by 3.3% annually over the next decade; in contrast, analysts project annual growth will be closer to 14.9%.

While there have been no recent analyst reports raising estimates for the bank’s earnings or revenues, the consensus is that Barclays will report net income per share for 2012 that is 2.5% higher than it reported in 2011. Moreover, when it comes to the top line, Barclays has a Predicted Surprise of 35.6%, signaling that the most recent reports and those by analysts with the highest ratings expect the bank to generate more impressive revenues than the consensus currently suggests. That in turn sets the stage for a positive surprise on the top line when Barclays reports its 2012 results.

On the valuation front, Barclays also seem to score well. While its price/book ratio and dividend yield are roughly in line with its peers, its forward 12-month price/earnings ratio is only 3.5; that gives it a score of 91 on the Relative Valuation model. The short squeeze indicator indicator is 94, meaning that there’s a relatively high probability that investors who have been taking short positions in the bank’s stock, betting that it will decline further, could be “squeezed” out of those bearish bets and forced to buy back the stock they have sold short. It’s not all good news, of course; the StarMine Structural Credit Risk model gives Barclays a score of only 3.

These scores are for the U.S.-listed stock of Barclays; those on the British-listed shares are slightly different, but in line with these results. Most analysts of the British stock appear to believe that the bank will struggle to generate a more appealing return on equity, however. For 2012 as a whole, the consensus currently is that the bank will earn an ROE of only 6.49%. The fact that the SmartEstimate suggests it will be even lower, at 5.97%, is a bearish signal, indicating that there is the possibility of more bad news on that front. The question remains whether investors will focus on that absolute level – still too low to make Barclays look enticing – or the relative ROE returns, in which comparative setting the bank is far more appealing an investment.

The coming months, as Barclays forges ahead to reinvent itself after navigating two separate crises in less than five years, will provide all watching with some insight into how banks might prepare themselves for a new world, one in which their activities will be more regulated amid a climate of even greater public wariness.

 
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