) is defending its business model as the British government
assesses the proposed reforms recommended by the Independent
Commission on Banking (ICB) in Britain. The ICB which was headed
by Sir John Vickers, a former chief economist at the Bank of
England, has suggested that investment banks should be separated
from retail banks. If implemented, these changes would certainly
The Royal Bank of Scotland Group
), HSBC (
) and Standard Chartered Bank (
Interestingly, competitors like Citigroup (
), Bank of America (BAC), UBS (UBS) and
(JPM) which are headquartered outside the UK, but have
significant presence in the country would be spared the axe.
Our price estimate for Barclays stands at
, a roughly 8% discount to market price.
The ICB and its Findings
The coalition government in the UK entrusted the 5-member ICB
with the task of understanding how stable and competitive the
financial system is in the UK. The ICB was also charged with the
responsibility for suggesting how to handle banks that were "too
big to fall".
The biggest suggestion by the ICB was to break-up large banks
and separate their investment banking and retail banking
divisions. This suggestion was on the back of the government
having to bailout RBS and Lloyds and use taxpayer money during
the economic crisis. The bailout was essential as the top six
British banks handle about 90% of all deposits, and with no
restrictions on the use of assets in retail deposits by
investment banking arms, banks were transferring their investment
risks even to customers having simple savings accounts.
Understanding the Impact on Banks
The potential reforms recommended by the ICB would force the
retail and investment banking divisions of the major banks in UK
to have different capital structures termed as
"subsidiarisation". A report by the management consulting firm
Oliver Wyman suggested that banks will consequently have to
face significant costs due to the difficulty in moving capital
across their divisions and would have to arrange for different
sources of funds for the newly separated divisions. This could
result in additional annual "frictional" cost between GBP 12 and
15 billion ($20 to 25 billion) for the banks.
So How Could this Impact Barclays?
The frictional costs would directly affect the operating
margins for both of Barclays biggest sources of value - the sales
and trading division, and the consumer banking division. The
operating margin for Barclays' sales and trading division was
almost 35% in 2010, and we expected the value to be maintained in
the years to come. But frictional costs could bring this margin
below 25%, wiping out almost 15% of the estimated value of the
The consumer banking margins would be affected to a lower
extent, but could potentially fall by about 5% from our current
estimates of 18%. This would eat up another 5% of the stocks
The imposed reform has the potential to reduce Barclays' value
by more than 20%, bringing our estimates down from the current
value of $18.30 to around $14.50.
See our full analysis and $18.30 price estimate