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Barclays Explores Downsizing for Expansion in Strategic Evaluation, Potentially Angering Investors

Barclays is eyeing smaller units to fuel its growth strategy and revive its flagging share price. According to insiders, the bank plans to invest more in its smaller businesses, such as U.S. credit cards, in a bid to boost returns. However, some of its major shareholders are urging the bank to opt for a quicker solution—a buyback.

CEO C.S. Venkatakrishnan, commonly known as Venkat, is exploring the possibility of allocating additional capital to wealth management, U.S. credit cards, and global payments. This information, revealed for the first time, follows Barclays’ engagement of Boston Consulting Group (BCG) earlier this year to review its strategic approach.

To brainstorm the optimal investment plan, a team of BCG consultants has temporarily set up camp at Barclays’ headquarters in London’s financial hub, Canary Wharf. Simultaneously, the bank is conducting an internal review to complement BCG’s efforts.

However, cost-conscious managers within Barclays’ investment bank have expressed concern over reduced staff attrition in their technology and back-office operations. The possibility of layoffs has been raised during the BCG review, although no decisions have been made thus far.

When asked about their collaboration with external consultants, a Barclays spokesperson commented that it is a common practice for the bank. BCG declined to comment on the matter.

Despite the bank’s intentions, some top Barclays investors have reservations about prioritizing investments over capital distributions. They question the logic of injecting more capital into divisions that pale in comparison to their competitors, especially during a time of global economic uncertainty and with Barclays’ shares suffering.

Instead, these investors advocate for tighter cost control coupled with increased buybacks and dividends. In April, Barclays completed a modest buyback program worth £500 million ($646 million).

Richard Marwood, senior investment manager at Royal London Asset Management, one of Barclays’ 30 largest shareholders, according to Refinitiv, explained their perspective: “We want the businesses we invest in to acquire and grow if it adds shareholder value. The real question is whether these acquisitions are better uses of capital compared to retiring equity. It’s a tougher benchmark to beat when your shares are undervalued.”

The stakes are high for Venkat, who has been the CEO for two years. Barclays’ stock price to tangible book value, which measures market value against assets, is currently at 0.54, the lowest among major British banks and significantly below rival HSBC’s 0.87, as per Refinitiv data.

Following the 2008 financial crisis, Barclays had a golden opportunity to bolster its presence on Wall Street after acquiring Lehman Brothers’ U.S. operations. However, finding the right business mix to attract new investors without alienating its more conservative backers has proven challenging for the bank’s executives.

In 2021, Barclays successfully fended off activist investor Edward Bramson’s proposal to downsize its investment bank. Since then, the 330-year-old bank has adhered to its transatlantic universal banking model, spanning investment banking, consumer lending, and corporate lending, gradually increasing group profits.

Nonetheless, a recent reshuffle within the investment bank has raised concerns about Barclays’ ability to compete in a global market experiencing a downturn in dealmaking activities. The aftermath of a U.S. securities trading blunder, resulting in a $361 million regulatory penalty and impacting recent earnings, continues to undermine shareholder confidence.

Richard Buxton, investment manager at Jupiter Asset Management, a top 25 Barclays shareholder, according to Refinitiv, acknowledged investors’ anxiety: “Investors are now wary of investment strategies when compared to the simple math of buying back shares at half book value. If Barclays can demonstrate that they can generate returns from their sub-scale businesses, then it would make sense to invest more in them.”

Some smaller investors are hopeful that the BCG review might present a fresh perspective on whether spinning off the investment bank could deliver the desired value to shareholders. Alan Beaney, CEO at RC Brown Investment Management, which has held Barclays shares since 2012, suggested, “You might achieve a higher valuation by demerging the investment bank. They are not currently valued properly when grouped together.”

A Barclays spokesperson reaffirmed that the bank’s businesses continue to perform well and that its business mix remains robust.

In addition to the ongoing BCG review, Barclays has enlisted another global consultancy to evaluate the potential expansion or consolidation of its payments businesses, as reported by Reuters in June.

Despite Barclays’ stock falling by approximately 3.5% this year, which underperforms the 10% gain seen in a benchmark index of European banks, as well as European rivals like BNP Paribas and HSBC, which have risen by around 5.5% and 18% respectively.

In the decade following the 2008 financial crisis, Barclays underwent several significant transformations, including a 2014 workforce reduction and a 2016 withdrawal from Africa. While these strategies have helped the bank stay profitable amid the pandemic and the current economic challenges posed by inflation, convincing investors of their ability to deliver consistent returns remains a challenge.

Barclays aims to achieve a return on tangible equity of over 10%. While its British retail and business banking segment achieved 18% in 2022, the payments and investment banking divisions narrowly met the 10% goal.

Jefferies analysts stated in a note, “We estimate the bank could generate around £19 billion in profit between 2023 and 2025, and we believe returning more of this to shareholders would address the weakness in share price better than another strategy review.”

(1 pound = 1.29 dollars)

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