Published On: Fri, Dec 2nd, 2016

Barclays Plc (OTCMKTS:BCLYF) Believes Africa Bank Sale To Be A Game Changer

The sale of Barclays Plc (OTCMKTS:BCLYF) Africa is a major catalyst seen for its stock. While sale timing is uncertain, it may occur sooner than the market assignments. A strategic sale is favored but an on-market clearance is a distinct probability. If it happens, it can be a prospective game-changer for the equity.

The highlights

Barclays’ capital position is strong, and the next rational initiative is a material dividend jump. A key part of company’s CEO Jes Staley’s strategic plan is the sale of Barclays Africa. It was an unexpected and brave move. The sell-side was nearly totally critical thinking Staley should have reduced the Investment Bank instead. Even when Staley disclosed his plan, there was deep sell off in stock. Shareholders were also upset by a dividend cut, which always remains a tough decision to accept.

Analyzing the last few quarters, it is evident that Barclays CEO followed the right plan all along. The investment bank is faring well and company’s capital position is also strong. Barclays was able to execute earnings accretive measures such as liability management, real estate rationalization and the faster run-down of its non-core segment. But, the low yielding dividend continues a sore point with many shareholders. The sale of Africa may help to offset that disappointment, which can help the stock to appreciate once deal is announced.

In 3Q2016, Barclays CET1 ratio came at 10.6%. The company organically makes around 30-40 basis points of capital quarterly. Non-core run-down and sale of BCS Africa can improve 100 basis points in CET1. Some capital headwinds are expected from litigation settlements.

The key message is that the projected end-state capital need for company is a CET1 ratio of 11.2% and a management buffer of 1% to 1.5% mainly due to regulatory uncertainties. Barclays 2019 end-state capital requirement target is a CET1 ratio in a range of 12.2% – 12.7%. It is vital to note that G-SIB buffer has further declined by 50 basis points, so end-target can be somewhat lower.

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