Zak Mir on Barclays – What Else Can Go Wrong?

I think it can be said quite fairly that my loathing for the UK banking sector is as strong as our beloved former editor at Spreadbet Magazine’s (and now a mere “editorial director”) love for the mining sector. Time and again the same clichés appear to be played out in the finance industry and time and again the same mistakes appear to be repeated. This time it is the turn of the nation’s beloved Barclays Bank.

According to reports, the bank, which loves to pay bonuses, is the subject of a Serious Fraud Office (SFO) investigation into the events surrounding its desperate attempts at avoiding nationalisation five years ago. As we all know, the efforts were successful and the stricken bank was saved by oil money from Abu Dhabi.But, questions remain about exactly what went on. Isn’t it interesting that just as we hear about the SFO investigation we also found out that last month the Abu Dhabi investment fund coincidentally sold its £2.2billion stake (representing 6.3% of Barclays) only last month (and for a hefty profit)? And what good timing this was given that just a few short weeks later and by all accounts it seems that Barclays appears to have contracted the corporate equivalent of bubonic plague! For instance, there is the SFO (as described above) who have been given £2 million by the Treasury to beef up their probe into the  bank’s bailout in 2008.  If recent history is anything to by, this will likely result in a fine of a few hundred million Pounds. When you also consider the potential liabilities arising from the mis-selling of PPI packages to consumers, the mishandling of interest rate swaps and of course, my personal favourite, the vast sums paid out in bonuses, it is no wonder that there is talk of Barclays having as large as a £7billion hole in its balance sheet.

Indeed, if you look at the bigger picture as far as Barclays is concerned in the run-up to tomorrow’s interim results, there will be few observers of the group who can paint a bright fundamental picture. The expectation is that the group’s profits will fall by £600million to £3.7billion in the first half.  Against the backdrop of the recent exit of the bank’s Middle Eastern investors, the runes aren’t exactly casting favourable omens for this company…  

However, as dire as much of this sounds, the really interesting question for investors at this stage concerns not events of five years ago, nor the Libor scandal, nor even the relentless move by regulators to increase and enforce capital requirements. No, the really interesting question is at £3.12 a share has the market sufficiently discounted all the expected bad news (and let’s face it there is a shed load)?

The simple answer to this question is, you might be surprised to hear, yes, probably!

Even though the Emirates have exited the stock, they were sufficiently encouraged by the fundamentals to have invested at a time of deep crisis. This has obviously since subsided and although the bank faces challenges in the near term, there is still a strong underlying business in place. Tomorrow I expect to see an initial shakeout in response to the earnings’ release but this could well provide a decent opportunity to buy.  Wall of Worry Rally here we go…