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Could Barclays’ share price rally on risky mortgage-backed securities bet?

British bank Barclays [BARC] is reportedly diving head first into the market that brought it into such hardship: securitisations. In response, the company's share price has traded sideways recently and is up just 2.27% year-to-date.

Barclays’ head of global markets Stephen Dainton told Reuters on 28 May “that the time was right for the British bank to re-enter the market in force”, as he believes that the FTSE 100 firm could bring in up to £1bn a year, the same being made by its global peers in the securities market.Barclays' 1-year share price performance, CMC Markets, 05 June 2019

 

The news comes as Barclays faces increased scrutiny from analysts, shareholders and board members. Last week, its struggling corporate investment business division came into focus for its lagging returns, spurring activist investor Edward Bramson to make a pit at securing a seat on the board. 

Although Bramson was outvoted, his argument for wanting to stem the development of the investment arm of the bank did raise concerns amongst shareholders that want to “wake this board of directors up”, as one put it during the bank’s annual general meeting on 2 May. 

With the banking group’s share price falling nearly 10% over the course of May to close below 150p, it appears that a change in strategy is necessary, particularly after an underwhelming set of first quarter results. Revenues are down 2% across the group, and the corporate investment banking division’s return on equity was down to 9.5% from 13.2% in the same period last year, putting all eyes on CEO Jes Staley to stage a much-needed comeback.

 

Market cap£26.23bn
PE ratio (TTM)7.89
EPS (TTM)19.30
Operating margin (TTM)28.14%

Barclays share price vitals, Yahoo finance, 05 June 2019

 

Meanwhile, the securitisation division of the bank brought in £500m in revenues last year, and the bank expects it can double those revenues in the next year. To give Barclays the scale it needs to compete in the market, the bank has assembled a team of 140 securitisation bankers and traders, who will work under veteran securitised assets trader Scott Eichel to begin bundling US home loans.

 

A risky bet? 

It’s been more than a decade since the global financial crash that was caused by bonds tied to US home loans but for Barclays, the memory is still fresh. As recently as March last year, the bank paid $2bn to settle a US probe into the alleged mis-selling of the mortgage-linked bonds. 

But according to Eichel, Barlcays new head of securitised products, the market has changed “both from [a] regulatory perspective and best practises inside firms”. “When you dissect the revenues, those years around the crisis were very heavily trading based, whereas now you are back to the banking model where about 80% of your revenues are coming from financing and origination,” Eichel said. 

“When you dissect the revenues, those years around the crisis were very heavily trading based, whereas now you are back to the banking model where about 80% of your revenues are coming from financing and origination” - Scott Eichel, head of securitised products

Barclays currently ranks sixth for sales of US securitisations, having risen by two places from the same period a year ago according to data provider Refinitiv. The bank also went from fourth to third in a year for underwriting asset-backed securities in the US.

 

Beyond securities

Staley’s ruthless pursuit to preserve and promote Barclays corporate investment bank has also led him to give the global head of banking Joe McGrath the go-ahead to hire up to 200 staff in the next two to three years to expand the business in Asia. 

“I want to invest in Asia and we will invest in the near term on a very measured basis but at some point, we'll need to take a harder look at what we want to do in a bigger way,” McGrath told Reuters, adding that growth markets like China and Southeast Asia will offer investment banking opportunities.

“I want to invest in Asia and we will invest in the near term on a very measured basis but at some point, we'll need to take a harder look at what we want to do in a bigger way” - Joe McGrath, global head of banking

As it stands, the bank’s stock has a relatively cheap P/E of 7.94, indicating that now could be the time to jump aboard. Looking ahead, the bank’s H1 results, which will be released on 1 August, will be the big reveal for investors to see if Staley’s plans to revamp his struggling investment arm are moving things in the right direction.

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