Barclays: not cheerful, but cheap

Of all the big banks, it's probably fair to say Barclays has had its fair share of bad publicity, says Matthew Partridge.


John Varley is facingcriminal charges
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Banking is not a popular sector. But of all the banks in Britain right now, it's probably safe to say that Barclays has had more than its fair share of bad publicity this year. Six weeks ago the Serious Fraud Office surprised many when it decided to press criminal charges against four former executives, including ex-CEO John Varley, over actions related to their decision to seek funding from Qatar during the height of the financial crisis. Experts warn that the trial could drag on for years.

But it's not just former executives who are under the spotlight. Current CEO Jes Staley is under investigation for his attempts to unmask a whistleblower last year, something that he admits was wrong. The Financial Conduct Authority and Prudential Regulation Authority are still investigating what happened and a report on his behaviour is due out in the autumn. Experts believe that if the report is particularly critical, Staley could yet resign, throwing the bank into turmoil.

If the public side of Barclays has been under pressure, at first glance the business side doesn't seem to be doing much better. Indeed, recent earnings figures have been disappointing. Compensation payments from the mis-selling of payment protection insurance, and costs associated with the disposal of assets in Africa, saw the bank post a heavy loss this quarter. Investors in the stock have also had a turbulent time even a recent rally has failed to lift them back to where they were two years ago, let alone restore them to the post-financial-crisis highs.

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Yet appearances can be deceptive. The sale of African assets should result in a more streamlined business and boost the balance sheet, increasing the tier 1 capital ratio (which increases the bank's ability to weather a downturn in the credit markets). That the process is being completed six months earlier than planned reflects positively on the management's commitment to further restructuring. The move out of Africa will also make it easier for Barclays to boost its return on capital (ROC) to 10%. Indeed, if you look at the core businesses, ROC is already a respectable 7.2%.

Barclays is also building up the investment-banking side of its business. Under Tim Throsby from JP Morgan, it's gradually increasing staff numbers and has decided to try to boost returns by moving capital that's currently tied up in poorly performing parts of its loan book elsewhere. Evidence that the investment-banking unit is turning a corner comes from the fact that share trading revenues rose 12% on the year.

Of course, turmoil in the executive suite could impede this process. But I'm confident that the CEO will be able to survive the investigation, especially since the bank has already formally reprimanded him and cut his pay. The changed regulatory environment in the US should also help the bank either settle remaining lawsuits around mortgage securities on favourable terms, or even avoid paying out altogether.

In any case, what really appeals about Barclays is its cheap valuation. It currently trades on 9.1 times forward earnings, and at a whopping 37% discount to the value of its net assets (and 27% to its tangible assets) rivals Lloyds and HSBC trade at premiums of 14% and 21% respectively, counting tangible assets. Even the beleaguered and still-nationalised RBS has a slightly lower discount of 25%.

So overall, this looks like a good opportunity. I'd suggest taking a long position in Barclays at 206.3p at£10 per 1p. I'd put astop-loss at 106.3p. This limits your total downside risk to £1,000. Naturally, if there are any adverse regulatory developments, I'll reassess the position, but I'm confident that Barclays should be able to weather any storm.

Understanding overnight charges

When you take out a spread-betting position you may notice that "holding costs" are deducted from your profit/loss. While the idea that you have to pay for the privilege of taking out a position may seem illogical, or even extortionate, there's actually a solid reason for it.

Spread betting involves making leveraged bets on a share, currency or commodity. This means that you are effectively borrowing money to bet on the asset. So, if you are betting £10 a penny on a share worth 100p, you are effectively buying £1,000 worth of shares and borrowing the money to do so.

To compensate for this, the spread-betting firm will charge you an interest rate equivalent to a percentage of the total trading size. This rate is linked to Libor (the London Interbank Offered Rate), the amount of money that banks have to pay when borrowing money from each other. Inevitably, an additional administration fee is tacked on. For example, both IG Index and CMC Markets charge 2.5% above Libor for long positions (when betting on a share). Short positions (ie, betting against a share) are slightly different in that IG Index will deduct the Libor rate from the 2.5% costs.

If you use a reasonable amount of leverage then holding charges aren't going to be that significant in terms of your account, especially in today's ultra-low interest-rate environment. Indeed, in the case of the above example, the total holding costs will be only £27.50 (£1,000 x 2.75%) a year and to be fair, £10 a point represents more than enough leverage for the vast majority of spread betters. However, if you are betting using much more substantial amounts for example, £100 per 1p then you would have to pay £275 a year in holding costs, which is more painful.

As holding charges are calculated on a daily basis, you might be tempted to try to avoid them by buying and selling the shares in the same day. However, this is a bad idea since the additional spread (the difference between the buy and sell prices) will more than make up for any savings not to mention the psychological hurdles involved in timing a daily entrance and exit from your trade.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri