Barclays (NYSE:BCS) is a UK-domiciled bank with a premier retail and corporate franchise in the United Kingdom, a strong transatlantic corporate and investment bank, and a leading position in credit cards within Europe. Understandably, the bank has been at the center of Brexit concerns. Political and regulatory uncertainty could lead to slower economic growth, weaker property prices, and low interest rates, all of which would be negative for bank profits. The investment bank would face higher costs if it must relocate employees and operating entities to continental Europe.
In the face of these challenges, Barclays—which has a new management team that we regard highly—has taken significant steps to focus on its core businesses and strengthen its balance sheet. The company has sold or shut down several “non-core” units, including its retail operations in Portugal and Italy and wealth management in Asia. Barclays also intends to sell its 62.3% stake in Barclays Africa. The profitability of its UK retail bank has been masked by elevated legal settlements related to past conduct. These costs are declining, and in turn, earnings should improve. In the investment bank, Barclays has exited nine countries, shed assets, and cut expenses. The combination of business scope reduction, cost cuts, and lower asset levels has enabled the company to increase capital. Its core equity capital ratio, a measure of its financial resilience, has improved from 9.1% in December 2013 to 11.3% as of March 2016.
Barclays trades at 0.5 times tangible book value and nine times forward earnings. This very low valuation is close to levels reached during the financial and sovereign debt crises, despite what we believe is a stronger and better capitalized franchise. Hence, we added to the position, which comprised 1.9% of the Fund on June 30.
From Dodge & Cox Global Stock Fund second quarter 2016 commentary.
