Barclays (BARC) has announced that chief executive Jes Staley is being investigated by the U.K. Financial Conduct Authority (FCA), and the Prudential Regulation Authority (PRA), after his attempt to identify a bank whistleblower.
While we believe the bank's board has taken the right steps, this does raise concerns regarding the overall ethics and culture of the bank, and we see this as a blow to management's credibility. At this point, we plan to maintain our no-moat rating for Barclays, along with our fair value estimate of £2.50 per share.
We also retain our Standard stewardship rating for the bank, as our stewardship ratings reflect capital-allocation practices, and we believe our rating fairly reflects frequent upper-management changes, as well as the high-profile misconduct and litigation charges that the bank has experienced since the crisis.
In its press release, Barclays highlights that the chief executive's actions came to the attention of its board of directors in early 2017; following this, the bank hired an external law firm for further investigation and notified the FCA, PRA, and other relevant regulatory bodies. The board also further concluded that, as the nature of this breach was very serious, the CEO's awarded compensation will see a significant adjustment.
In 2013, the Barclays board commissioned Anthony Salz to carry out an “independent external review” of its business practices systems, controls, and culture. Barclays undertook the recommendations of the Salz review, which it completed in 2015. This newly surfaced investigation now raises questions regarding whether these cultural changes have truly been adopted and are beneficial, and whether we will see further conduct- and litigation-related issues.
Investment Thesis
We believe Barclays, having nearly completing its restructuring plan, will be ahead of peers in terms of focusing on its core business and grabbing market share. Within two years, the bank has managed to reduce risk-weighted assets in the noncore segment by £85 billion and aims to close it with £25 billion in June 2017, six months earlier than planned, which in our view is positive and doable and will help Barclays to improve the risk profile of the bank. However, in the short term, we believe outstanding litigation and conduct charges are a downside risk to future earnings.