Investors are underestimating the potential profitability of Barclays Plc (BARC)’s securities unit as the lender cuts costs and is able to reinvest capital, according to Morgan Stanley research.
Barclays, Britain’s second-largest bank by assets, has the potential to take market share from competitors such as UBS AG (UBSN) and Royal Bank of Scotland Group Plc as they retreat from fixed income, currencies and commodities trading, said analyst Chris Manners in a note to clients today. Cost-cutting at the investment bank is also “not well understood” by the market, the Morgan Stanley analyst said.
“The market does not fully appreciate the potential for Barclays’s investment bank to generate attractive returns,” Manners, who has an overweight rating on the stock, said in the note. “We expect Barclays to meet regulatory thresholds without raising fresh equity and note that 9 billion pounds ($14 billion) of capital is tied up in FICC legacy assets,” which could be reinvested in profitable business, he said.
The bank, based in London, has been bolstering its investment-banking unit by focusing on the U.S., where rising income from arranging takeovers and stock offerings is helping to offset a drop in Europe. Barclays’s “core” investment bank could increase its return on equity, a measure of profitability, to 17 percent by 2015, from 15 percent, Morgan Stanley estimated.
Barclays posted a bigger-than-estimated gain in investment-banking profit in the first quarter and said it’s on track to meet its target for cost reductions. Income at the equities operation rose 19 percent to 706 million pounds from a year earlier, while investment-banking revenue, which includes merger advisory, advanced 8 percent to 558 million pounds on rising fees from equity-capital markets.
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