So Bob Diamond has quit. Is it time to buy Barclays?
After an initial bounce, the shares closed down on Tuesday, and have fallen 15 per cent since the bank was fined last week for its attempts to manipulate Libor. That leaves them trading on 0.4 times book value, a discount to rivals with similar combinations of retail and investment banking – BNP Paribas and Deutsche Bank trade on 0.5 times book value, while JPMorgan is on 0.8 times.
The question for investors is whether Barclays can close this and other gaps. Its 2011 return on equity was 5.8 per cent, well below the 8 per cent from BNP Paribas and Deutsche Bank and the 11 per cent from JPMorgan. If Barclays is to justify a higher valuation, it will have to improve its returns. This year started well, thanks partly to lower provisions in its well-regarded UK retail business. But the heavy lifting will have to come from the investment bank, which accounts for just over half of Barclays’ pre-tax profit. Over the long term, pension funds’ appetite for fixed income should play to its strengths in debt capital markets, while a new chief executive might take an axe to costs in some parts of the division. So there is some hope on the revenues and margins front. But in today’s regulatory environment there is little hope of being able to improve returns by increasing leverage, despite Barclays’ strong core tier one capital ratio of 10.9 per cent.