Barclays (BCS), the beleaguered London-based bank, has confirmed reports that it is in discussions to sell its leading exchange traded fund business, known as iShares. Barclays says no decision has been made.
Barclays can't be happy about having to explore selling iShares, which is part of its successful Barclays Global Investors (BGI) fund management business. ETFs, which are securities that track anything from stock indexes to industry sectors to commodities and are traded on exchanges like stocks, have become increasingly popular as both trading and investment vehicles because they have lower management costs and fewer potential conflicts of interest than classic mutual funds. At the end of last year iShares had about $330 billion of the roughly $1.4 trillion BGI had under management.
Unlike most British banks, Barclays was profitable last year, but the bank is under pressure to improve its capital ratios, which are now substantially lower than partly nationalized British rivals Lloyds Banking Group (LYG) and Royal Bank of Scotland (RBS), which have accepted government funds. While Barclays has avoided taking bailout money, in part by offering a large chunk of equity to Persian Gulf and sovereign wealth fund investors, it has seen its stock price whacked by almost 80% over the last year. The news of a potential iShares sale pushed the stock price up almost 20% on Mar. 16 and helped lift the London market.
Barclays has probably been the most innovative of the big British banks, and iShares is just one of its interesting businesses. Its investment banking unit, Barclays Capital, has been a trendsetter in a range of nontraditional banking businesses including commodities and fancy credit products. Such businesses are of course highly unpopular with investors at the moment, but Barclays reports that several of them, including currency trading, continue to perform well in the current volatile climate.
Barclays management, led by Chief Executive John Varley and President Bob Diamond, is determined to use the credit crunch as an opportunity to capture market share. The most prominent example of such a strategy was their buying the U.S. operations of Lehman Brothers last year for around $2 billion. But such moves worry investors, who have continued to pan the stock. While Barclays' loan book is not as toxic as those of Lloyds and RBS, investors still worry that large future writedowns will put the bank at increasing risk. Barclays is talking with the British government about participating in an insurance scheme that would see the government taking the main risk on some debt in return for a fee.
In this climate Barclays management evidently has concluded that the bank would be advised to seek additional capital. So it is exploring potential asset sales. Disposals will likely involve selling something they would rather not sell. One choice is iShares. Another is the valuable South African bank Absa Group. The well-regarded Barclaycard credit-card business is a third. The hope is that a relatively small sale in the range of a few billion dollars will be enough of a bone to keep the markets and the regulators away from Barclays' door until the banking climate improves.
Reed is London bureau chief for BusinessWeek.