Barclays investment banking arm 'under appreciated', Berenberg upgrades
Concerns about Barclays’ investment banking business have been overdone, according to Berenberg, causing their analysts to up their recommendation to a 'buy'.
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Barclays' shares have suffered recently as investors questioned its long-term strategy for its investment banking business.
The high street bank made a dramatic move into the US investment banking market when it snapped up Lehman Brother's American investment banking and capital markets business just two days after the Wall Street giant collapsed back in 2008.
It is now the biggest European investment bank in the US, with the American business accounting for around 60% of its global investment banking activities. But revenues from Barclays trading and investment banking activities have fallen in the decade since the deal. This is in part because revenues have declined worldwide across the sector, but also because of strategic decisions taken by the bank, many of which have concerned analysts.
Yet Berenberg said that while it remained cautious in its revenue outlook for the unit, it believes the market "under appreciates the strength and momentum in Barclay's investment bank" and that expected returns of around 5.5% on the unit's tangible equity were too low.
"[Barclays] has strongest franchise of any non-US bank in the profitable US investment banking market and is gaining market share. We believe Barclays investment banking returns can rise towards 9% by full year 2020, with group returns bolstered further by its best-in-class UK business."
The analysts added: "Barclays is not just another European investment bank. Specifically, the bank’s US franchise (around 60% of the investment bank) is stronger than any non-US peer and is gaining share. This foothold is valuable: [our] analysis indicates that US investment banking transactions are at least twice as profitable as those in Europe."
Berenberg now believes that the current discount on the shares – Barclays trades at around a 20% discount to European banks on a 2019 earnings per share basis – was unwarranted, and has upped its recommendation to a ‘buy’ from a ‘hold’.
The new price target for the shares is 220p, around 0.85x TBV.
At 1100 BST, the shares were ahead 2p at 173.8p in London.