Barclays’ Sale Of Portuguese Ops At Discount Likely To Impact Exits In Italy, France

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Earlier this week, Barclays (NYSE:BCS) inked a deal with Spain’s Bankinter to sell a bulk of its retail banking operations in Portugal – the latest move by the British banking giant towards shrinking its retail presence in Europe. [1] The sale includes Barclays’ Retail and Wealth Management operations as well as a part of its Corporate Banking business, which is focused on small and mid-sized enterprises. Notably, Barclays will incur a loss of £200 million ($300 million) from the transaction, as it agreed to dispose of the operations at €100 million ($112 million) – roughly 40% of its book value. [2]

Barclays had detailed its intention to exit the retail banking industry in France, Spain, Italy and Portugal well over a year ago (see A Look At Barclays’ Revamped Strategy And Its Impact On The Bank’s Shares), so the sale in itself is no surprise. The soft economic outlook for the Eurozone and the fact that Barclays sold its operations in Spain at a loss this January also pointed to a below book price sale for the units in France, Italy and Portugal. [3] However, the significant discount offered by Barclays in the sale of the Portuguese unit seems to stem from executive chairman John McFarlane’s urgency in divesting non-core assets. We believe that this heavy discounting may be repeated for the larger retail units in Italy and France, and will result in additional one-time losses for the bank over the coming months.

We maintain a price estimate of $19 for Barclays’ stock, which is about 20% ahead of the current market price. A bulk of this price difference is a result of the sell-off across sectors over recent weeks from weak global economic cues. However, the disposal of non-core assets at extremely unfavorable prices does present a minor downside to our price estimate.

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Over recent years, Barclays has implemented significant changes to its business model as a part of its ongoing Project Transform. While a majority of the changes were targeted towards the investment banking division, the bank also detailed its intention to focus its retail banking presence in U.K. and Africa last May. [4] This decision entailed an exit from retail banking operations in several key European nations, including Spain, France, Italy and Portugal.

Barclays took the first step towards streamlining its retail banking business by announcing the sale of its Spanish unit to CaixaBank for £800 million ($1.2 billion). [3] The agreement included Barclays’ retail banking, wealth management and corporate banking units in Spain – essentially the same as the recently announced plans in Portugal – and saw the bank incur an after-tax loss of £500 million ($750 million). Assuming a tax rate of 30%, this indicates a pre-tax loss of £715 million ($1.1 billion) for Barclays. Adding this to the sale price, we obtain a book value of £1.5 billion ($2.3 billion) for the Spanish business. This implies that Barclays sold the Spanish retail business at roughly 55% of its book value.

For the Portuguese unit, the €100 million (~£75 million) sale price was at 40% of the book value – a steeper discount than the sale in Spain. [2] While the difference in size as well as profitability for the Spanish and Portuguese units must have played an important part in the sale price, an important factor at play here is the new executive chairman’s policy of cutting costs as rapidly as possible. This policy will allow Barclays to attain its desired structure earlier than the initial target of 2017-end, and will have benefits in the long run. However, it will also likely mean divestitures at sub-par values in the near future. This will be particularly important in terms of the sale of retail banking units in Italy and France, which are larger in size than the Spanish unit.

Huge one-time losses from the sale of these units will have a negative impact on margins for Barclays’ Non-Core Operations Unit (NCOU), which houses them. You can see how a reduction in these margins affect Barclays’ share value by making changes to the chart below.

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Notes:
  1. Barclays announces further Non-Core disposals, Barclays Press Releases, Sep 2 2015 []
  2. Bankinter acquires the retail business of Barclays in Portugal, Bankinter Press Releases, Sep 2 2015 [] []
  3. Barclays completes sale of Spanish Businesses to CaixaBank, Barclays Press Releases, Jan 2 2015 [] []
  4. Barclays announces Group Strategy Update, Barclays News Releases, May 8 2014 []