Dear Mr. Staley, & Mr. McFarlane,
Firstly, I would like to congratulate the bank on the recent results reported for year-end 2016, and Q1 2017. The transformation we’ve seen at Barclays in such a short time-frame from when Mr. Staley took the CEO position in October 2015 has been most satisfactory. While significant challenges remain ahead, we are now on a clear path towards high quality and sustainable earnings. For that I feel that you must be commended for your efforts. However, I am not writing this letter solely to congratulate the team on this, I am writing as an individual shareholder with a specific view on capital allocation going forward.
I noted with particular interest that the Terms of Separation with Barclays Africa had been signed on the 31st of May 2017. I feel that this marks a watershed moment for Mr. Staley and the current management team. Not only does it signal the de-consolidation of Barclays Africa from the Barclays balance sheet, but it also raises the CET1 capital ratio well in excess of the target set down in 2016. If my understanding of the present situation is correct, then the de-consolidation of the African business now puts Barclays within the 13.2%-13.3% range of CET1 capital ratio, well in excess of the 12.3%-12.8% range specified as required by Mr. Staley in March 2016. I believe the opportunity now exists to shrewdly use this extra capital to generate an outstanding return for shareholders.
“Any management of a bank that is trading below its book value can’t sleep at night,”
Mr. Staley made the above statement on March of 2016, and while it is true that the differential between the share price and book value has closed somewhat since this comment was made, it remains and is still significant. As I write this letter, the Barclays share price stands at £2.11 (June 2nd 2017 close), a discount of just under 28% to tangible book value of £2.92. I certainly recognise management’s priority isn’t with the short-term fluctuations of the share price. However, I do think in certain circumstances, questions must be asked when such a clear discount persists over an extended period of time, as is the case with Barclays. Clearly the market is signalling only one outcome here; namely that Barclays is a mediocre business, and thus deserving of such a discount. If you are to believe as I do that this is not the case, that Barclays will have a future that is more glorious than its recent past, then now is the time to consider how we can maximise our investment today in order to deliver a superior return tomorrow. I feel that with some excess capital now available, a compelling opportunity now presents itself.
When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.
Warren Buffett wrote the above in his 1984 letter to Berkshire Hathaway shareholders and I believe what he wrote couldn’t be more true for Barclays at this moment of time. With our bank now trading at a significant discount to tangible book, a stock repurchase plan now looks incredibly accretive to investors on a per-share basis.
As of the last Q1 2017 report, Barclays reported the following numbers.
- RWA £361bn
- CET1 ratio 12.5%
- Share count 17.03bn
If we were to propose a stock buy-back of 850m shares and acquired them at the current £2.11 stock price, I estimate the numbers end up as below.
- RWA £340bn
- CET1 ratio 12.8%
- Share count 16.2bn
As you can see CET1 ratio stays at the upper-end of management’s guidelines. However, book value and earnings per share increases in an accretive manner to shareholders, thanks to the fact we are purchasing well below book value. As the bank grows into the future, returns should compound as the growing numerator of earnings will be upon a shrunken denominator that is the share count.
Last year you took the brave step in cutting the dividend last year because you knew it was the cheapest way of raising capital and generating long-term shareholder returns. Going forward, as we start to create surplus capital on the balance sheet, I would urge you to consider the benefits of a stock buy-back, particularly while it trades below tangible book value.