Barclays urged to ditch Africa unit and focus on core UK business

BARCLAYS CEO Jes Staley should take the “big decisions” to spin off its investment bank and sell its Africa unit to fix the UK lender, which trades at about 40% less than its book value, according to Sanford C Bernstein.

Barclays owns 62% of Johannesburg-based Barclays Africa Group, the legacy of a 2005 deal by former Barclays CEO Robert Diamond.

“The Africa business has absolutely no synergy whatsoever with the rest of the bank,” analyst Chirantan Barua wrote to Mr Staley in an open letter.

“With just 10% of your earnings from Africa, you never get a bid up when the continent’s in a bull market, but when the rand is in free-fall, investors are prompt to knock it out of your valuation.” Both the South African Reserve Bank and the World Bank have downgraded their growth expectations of Africa’s most developed economy to less than 1% this year.

Ratings agency Moody’s warned last week that SA’s slow growth was “credit negative”, putting its credit rating in line for a downgrade to junk status.

“Where should Barclays be in 2020?” Mr Barua asked in the note.”A pure-play UK retail and commercial franchise with the best technology platform in Europe, with Africa gone and the US investment bank carved out.”

Separately on Friday, Joseph Dickerson, a London-based analyst at Jefferies International, said Mr Staley should sell the Africa unit as the growth outlook for the continent worsened and bad loans started to rise. It was also “unlikely” the bank would be able to sustain dividend payments this year and the next, he wrote in a note to investors. He has a buy rating on the shares.

Mr Staley, a former co-head of JPMorgan Chase’s securities unit who became CEO in December, will present a broader strategic update with full-year results on March 1.

Mr Staley, and chairman John McFarlane, joined the British lender with a mandate to revive profit growth and reverse a two-year slide in shares that has left the bank trading below its book value, meaning investors think the company is worth less than its assets.

Michael Rake, the bank’s former deputy chairman, has previously said the bank must decide whether capital is best deployed in Africa, amid slowing growth in SA and a need to shrink its balance sheet.

Last month, Barclays cut 1,200 jobs at the investment bank, its least profitable division, and will exit nine countries, according to a person with knowledge of the matter. The board is reviewing whether to keep its Africa business amid capital constraints.

Mr Staley’s best option was to break up the bank with an initial public offering of a reconstituted Lehman Brothers and a sale of the US credit card business, Mr Barua said.

The new US securities unit would require $6bn of funding and should be listed in 2020 or 2021 with a new management team, he said.

“The elephant in the room is the investment bank,” Mr Barua said. “It needs major surgery, but all that we’ve had is patches here and there.”

Shrinking to profitability was “possibly one of the worst strategies ever in the history of banking”, he said, and housing “what is essentially a US investment bank inside a UK retail bank” was “an absolute investment nightmare”.

Bloomberg

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