Barclays PLC (LON:BARC) shares gained as Berenberg upgraded the stock to a ‘hold’ rating from ‘sell', saying the quality of the bank’s UK business has been “overlooked” as investors avoid assets in the nation due to Brexit uncertainty.
Berenberg said it believes Barclays has the “most attractive” UK business among its peers because it has grown “counter-cyclically” and benefits from “superior” risk-adjusted margins and a low cost income ratio.
While the UK business is “best-in-class and is cyclically well-positioned”, its strength is diluted by the lender’s wider strategy, Berenberg added.
“In particular, we believe the decision to prioritise the growth of the investment bank (IB) over dividends is a strategic misstep,” Berenberg said.
“In the short-term, capital returns must take priority. Longer-term, a break-up of Barclays would unlock the discount to TBV (tangible book value).”
Barcalys shoud divest in investment bank and US cards unit, says Berenberg
On its argument for a break-up of Barclays, Berenberg said synergies between IB and the UK retail and Barclaycard businesses are limited, particularly given structural reform.
“Divesting the IB would allow greater balance sheet certainty and for each business to be valued on a true multiple,” the broker said, leaving its target price at 200p.
“Sale of the US cards business could also release capital and unlock value.”
Since neither strategy is likely in the near term, these options are not reflected in the current share price, Berenberg said.
Conduct costs could weigh on TBV growth
The broker expects about 3.5% annual growth in TBV from 2017 but said its estimates are “far from certain” given the group’s pending conduct issues.
It predicts conduct costs of US$3bn related to the mis-selling of mortgage-backed bonds in the US along with a £500mln settlement with the UK Serious Fraud Office on charges of fraud over the way the bank raised billions of pounds from Qatari investors enabling it to avoid a government bailout during the financial crisis.
Such costs would extinguish the bank's TBV growth, Berenberg said.
“Without meaningful dividends or sustainable TBV growth, we see little reason to buy Barclays,” it said.
“However, with the stock trading on 0.69x our 2017E TBV and considering the strategic options available to management, we believe risks to Barclays’ current share price are increasingly evenly balanced.”
Barclays, which reports its third quarter results on Thursday, saw its share price rise 1.6% to 195.15p in afternoon trading.
Trump's tax plan provides another lift to Barclays shares
Shares were also supported by news that the US Senate approved a budget resolution for the 2018 financial year that will pave the way for tax cuts.
US President Donald Trump called out senator Rand Paul, who said he was "all in" for massive tax cuts even though he was the only Republican to vote against the budget measure a day earlier.
“The Budget passed late last night, 51 to 49. We got ZERO Democrat votes with only Rand Paul (he will vote for Tax Cuts) voting against,” Trump wrote on Twitter.
Barclays is expected to be the biggest beneficiary of lower US taxes among major UK banks since it has the highest US contribution to group earnings.