ADRs of Barclays PLC (BCS) were up nearly 7.4% on Thursday, with the market welcoming the moves that the company is slated to undertake to regain profitability. The U.K.-based bank plans to slash 14,000 jobs by this year-end and a total of 19,000 by 2016. Further, the company will be restructuring its entire business and create a ‘Bad Bank,’ as well.
Barclays will presently focus more on retail banking business, while selectively avoiding risky and volatile investment banking operation. This will lead to 7,000 job cuts in the Investment Bank by 2016. Additionally, over the long term Investment Bank will account for a maximum of 30% of the company’s risk-weighted assets (RWAs), down from nearly 50% at present.
Moreover, Personal and Corporate Banking segment will have the same size as the Investment Bank, while both Barclaycard and Africa will account for 20% of RWAs each. Also, the company identified several non-core operations as a part of its strategic review and decided to create a bad bank named – Barclays Non-Core.
Barclays Non-Core will comprise part of investment banking operations which the company plans to exit (physical commodities, non-core derivatives and certain emerging market products), European retail business and non-core banking operations in Europe and the Middle East. At present, Barclays Non-Core will have £115 billion ($195 billion) of RWAs, which is targeted to be downsized to £50 billion by 2016.
Consequently, this will aid in reducing the segment’s drag on ROE to 3% from the present 6%. On the whole, Barclays targets ROE of 12% by 2016 for its core operations.
As a result of all these initiatives, the company would incur expenses of £800 million as a part of cost to achieve Transform, which is in addition to £2.7 billion already announced in Feb 2013. Further, Barclays lowered its 2014 expense guidance to approximately £17 billion, down from the prior outlook of £17.5 billion. Moreover, by 2016, the company anticipates the expenses for its core operations to be around £14.5 billion.
Apart from this, the company expects the dividend payout ratio in the range of 40-50% by 2016, though payout ratio will likely remain at 40% until it achieves common equity tier-1 ratio of 10.5% by 2015.
Amid sluggish economic environment and stringent regulatory requirements, Barclays’ plans to realign its operations to better manage the organization are commendable. Since last year, the company has been striving hard to mitigate macroeconomic pressure through restructuring, though without much results.
Nevertheless, we expect that the company’s latest restructuring initiatives to improve efficiency will help in enhancing its performance. Further, with more focus on retail banking, Barclays is attempting to regain stability in its earnings.
Barclays currently carries a Zacks Rank #5 (Strong Sell). Some better-ranked foreign banks include ICICI Bank Ltd. (IBN), Westpac Banking Corp. (WBK) and Banco Macro S.A. (BMA). All of these stocks hold a Zacks Rank #1 (Strong Buy).
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