Barclays’ Decision To Exit Africa And Slash Dividends Not Good News For Investors

-4.90%
Downside
9.08
Market
8.63
Trefis
BCS: Barclays logo
BCS
Barclays

Barclays’ (NYSE:BCS) ongoing struggle to return to profitability since the downturn of 2008 is no secret to investors, as the British banking giant continues to work its way through a long list of legal charges for financial misconduct as soft economic conditions in Europe weigh on its results. But the bank’s decision to beat a retreat in Africa announced early last week along with a dismal operating performance for fourth quarter 2015 was largely unexpected. [1] After all, Barclays has operated in Africa for more than 100 years, and is a major banking player in many sub-Saharan countries which have immense growth potential. In fact, the bank’s decision to cut its stake in Barclays Africa Group Limited (BAGL) from 62% now to around 20% by 2018 is a marked departure from its strategy of expanding its presence in the region over the last few years.

With Barclays already working on the sale of its retail banking operations in France and Southern Europe, and also its wealth management unit in Asia, the proposed stake sale in BAGL will result in the bank’s once considerably diversified business model shrinking to just two divisions: Barclays UK and Barclays Corporate and International. This new structure complies with the British government’s ring-fencing directive for the country’s banks, but the necessary division of capital will require the bank to make up for the shortfall by slashing dividends by more than 50%.

Relevant Articles
  1. Barclays Stock Trailed S&P 500 By 23% In 2023, What Happens Next?
  2. Barclays Stock Is Undervalued
  3. Where Is Barclays Stock Headed?
  4. Barclays Stock Is Undervalued
  5. What To Expect From Barclays Stock?
  6. After Earnings Miss In Q2, Where Is Barclays Stock Headed?

While the changes Barclays is implementing should eventually boost returns for investors, the unresolved legal burden, restructuring costs and lower dividends present a significant downside to the bank’s share value over the next couple of years. Also, we believe that the bank’s decision to reduce its stake in BAGL will come with sizable losses. That is why we have revised our price estimate for Barclays’ stock downwards from $18 to $14. The new figure is still roughly 40% ahead of the current market price.

See our full analysis for Barclays’ stock

Africa Banking’s Losses Don’t Take Away From Growth Potential

With a 62% stake in Barclays Africa Group Limited, Barclays is the majority shareholder in the diversified financial company that has a sizable presence in 12 sub-Saharan countries including South Africa. Over recent quarters, results for the region have suffered due to a devaluation in the currencies – putting pressure on the overall economy. This weighed on the bottom line of the parent company for a quarter that was already weak for global financial institutions. Barclays’ troubles were exaggerated by the fact that the majority stake forces it to consolidate its results for BAGL. With conditions in the region expected to remain sub-par in the near future, and with Barclays looking for ways to boost returns on equity, the decision to cut the stake in BAGL to a level of 20% addressed both these issues.

But it doesn’t look like the best long-term option for Barclays. While we believe that the move will help Barclays reduce its losses in the short run, it will also forego significant gains in the future. In fact, BAGL continues to have an optimistic outlook for the region and is expected to expand its presence further over coming years. Accordingly, the reduced stake represents a sizable lost opportunity for Barclays. The situation is only made worse by the currently depressed equity valuation levels – which may force Barclays to sell its stake in BAGL at a deep discount.

To put the overall impact on Barclays in perspective, our analysis of Barclays at the end of Q3 2015 attributed roughly 15% of the bank’s $18 price estimate to its Africa business – representing a contribution of roughly $10.5 billion in value from the unit. But as seen in the chart above, the stake sale will reduce the division’s share of the bank’s total value to just over 3%, or $2 billion.

Card Business Will Be Key To Barclays’ Long-Term Growth

Despite the series of major changes to its business model since the economic downturn of 2008, the one division that has remained almost entirely in its original form over the years is Barclays’ card division. Barclaycard is almost exclusively focused on the U.K. and U.S., and has a strong presence in these markets – justifying the bank’s decision to not tamper with the unit. And a strong performance for the year makes it clear that this is the best way forward for the division.

Growing card usage – coupled with the positive impact of exchange rate fluctuations – helped revenues reach a record £4.9 billion ($6.9 billion) for full-year 2015. This represents an improvement of 13% year-on-year. However, the impact on the bottom line was softened by an 8% increase in operating costs as well as a 6% growth in credit provisions. Overall, the pre-tax income figure improved 22% as the cost-to-income ratio figure improved from 43% in 2014 to 42% in 2015.

Our analysis of Barclays attributes almost 30% of the bank’s value to its card business. You can see how changes to the division’s operating expenses affects total share value by making changes to the chart below.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Barclays plc 2015 Results, Mar 1 2016 []