Barclays: Breaking up’s not hard to do

- Initiating coverage with Outperform rating "We initiate coverage of Barclays with an Outperform rating and a Target Price of 399p. Barclays is not only a play on a robust recovery in earnings post the credit-crisis, but is also as a possible restructuring story."
- Trading at discount due to dominance of investment banking "Barclays is perceived as having emerged from the credit crisis as a winner, but trades at a meaningful discount to its peers. This is surely linked to the fact that in Q1 2010 investment banking generated 81% of pre-tax profits. In a bid to balance the business, Barclays has a goal of reducing the contribution of investment banking to 30% of earnings. This cannot be achieved through an organic growth strategy. Similarly, a large retail banking acquisition would carry substantial execution risks and meet with considerable regulatory and political opposition."
- A break-up could offer shareholders substantial upside "As a consequence, we think Barclays is evaluating a break-up of the bank Political considerations and commercial imperative would see investment/corporate banking and Barclays Wealth spun off into a NewCo, leaving the remaining Barclays business as a pure play on retail banking. Valuing the two businesses using peer group multiples, which are currently at depressed levels, suggests this could provide upside for shareholders of between 27% and 39%."
- Catalyst needed to unlock the fundamental valuation "Our sum-of-the-parts valuation of 399p reflects adjusted earnings enjoying a CAGR of 38% between 2009 and 2012, on the back of falling impairments (a decline from 164bps to 83bps) and harvesting the investment in Barclays Capital. In addition, our pro-forma 2011e Basel III Core Tier 1 ratio (base case) of 8% looks adequate and the sale of the Blackrock stake could add 100bps. The increasing prospect of a breakup should provide further support to these positive fundamentals."
Mediobanca Initiating Coverage 20100706

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