It looks like things weren’t all bad for Barclays (NYSE:BCS) in 2012. The U.K.-based banking group which has been under severe criticism since June 2012 when it was fined $451 million fine by British & American regulators over its involvement in manipulating the LIBOR (see Barclays Paying $451 Million in LIBOR-Fixing Case, Who’s Next?), did quite well to top the list of investment banks in the U.K. for 2012. 
Barclays roped in £184 million ($297 million) in fees by providing advisory & underwriting services to companies in the region to get ahead of Goldman Sachs (NYSE:GS) and JPMorgan (NYSE:JPM) who held the first and second positions in 2011. These results would definitely be a shot in the arm for Barclays’ top management who have been warding off strong demands from investors as well as regulators to substantially shrink its investment banking arm in the wake of the LIBOR scandal.
We are in the process of revising our $15 price estimate for Barclays stock, in view of various changes to its business model announced in the recent past.
- Legal Costs Will Hurt Barclays In The Short Run, Still Worth $18
- Barclays’ Sale Of Portuguese Ops At Discount Likely To Impact Exits In Italy, France
- Barclays Reports Strong Q2 Results Despite Incurring Heavy Legal Charges
- Weak Debt Market Activity In Q2 Likely To Hit Origination Fees At Banks
- Barclays To Discontinue Trading In Non-Agency U.S. Mortgage-Backed Securities
- Taking Stock Of How Much Banks Have Paid For Settling Forex Manipulation Charges
The Strategy Or The Economic Climate?
So what exactly is responsible for the improvement in Barclays’ U.K. investment bank rankings – the new course charted by the new heads, or is it just because of an improvement in the overall economy? We believe it is a bit if both. Like most of its competitors, Barclays is also cutting down on its investment banking functions around the globe and initiated a move to trim 2,000 jobs in mid-December.  But the management stood its ground against demands to reduce investment banking operations to a fraction of its former self – a decision that looks justified to a good extent as of now.
No doubt, the steady improvement in the economic climate for the Eurozone region in particular and the world in general also have a significant hand in boosting Barclays’ fee revenue figures. As we mentioned in an earlier article titled Global M&A Activity Reaches 4-Year High In Q4 2012; More To Come In 2013, the last quarter of the year has been the best since Q3 2008 in terms of global merger & acquisition (M&A) activity and the period has also seen a healthy improvement in the demand for debt and equity underwriting services. Corporates who had been shelving plans to raise additional capital or to use existing capital for acquisitions in the wake of the economic downturn are now revisiting those plans. And as these activities increase, the companies rope in investment banks like Barclays to help materialize them.
Why It Matters To Barclays
Barclays’ advisory & underwriting services fees represents roughly 7% of Barclays annual revenues, and our analysis of the bank shows that this is approximately how much value it contributes towards Barclays share value. Any increase in the total value of deals that the bank takes part in proportionately increases the fee revenue the investment banking division generates. So as the size and number of deals increase, the total revenue and as a result the estimated share value for Barclays also goes up. You can understand the exact impact on the share price by making changes to the chart above.Notes:
- ‘Casino’ puts Barclays top of UK investment bank league, The Telegraph, Dec 27 2012 [↩]
- Barclays could slash up to 2,000 jobs, The Telegraph, Dec 13 2012 [↩]