Is Barclays Bank a growth business?

The growth position of the ratios of Barclays Bank can be summarised in three words in the Financial Times - "ahead of expectations". They justify in ample measure the golden words of Philip Whiterow, which appeared in the February edition of the Bloomberg Money magazine in the section 'Stockwatch'.

There he stated: "There are other reasons why Barclays is worth a look. If the UK economy holds up, profits this year could hit £5 billion for a price to earnings (P/E) ratio of 10, while the dividend yield of 3.9% looks rock solid."

Whiterow had just written that Barclays could be a takeover target for an American bank, to the obvious joy of its shareholders, who would then expect the share price to react more than proportionately to the advantageous situation, as share prices do in similar circumstances.

Whiterow wrote deeply knowledgeable words confirmed by the publication of the last Barclays results. I quote Whiterow extensively for the realisation of his forecast of Barclays' financial situation makes me respect more his ideas about the possibility of the acquisition of Barclays by some American banking behemoth, such as Citigroup.

This possibility was not discovered by Whiterow, but he has given it an excellent presentation in a publication enjoying high prestige. Whiterow stated: "It's hard to believe Barclays, with a market value of some £38 billion, could be a takeover target, but the talk continues to swirl around the UK's blue-blood bank all the same.

"Last year it was US giant Citigroup that was said to be considering the offer. This year's rumour is that Barclays was in talks last year about a merger with Wells Fargo, another sizable US player.

"The latest bit of gossip was enough to send Barclays' share price shooting up, suggesting, if nothing else, that there are more than a few who consider Barclays a plausible target. One reason is that in the UK the group's ambitions are now severely limited by competition restrictions. Europe is a possibility but to be a really big hitter in the banking world the US remains where the action is."

A takeover target?

Whiterow was presenting Barclays as one of the world's top shares because he saw in it a growth potential, which is something great American banks seem to see, but which few small European investors have as yet noticed.

This comes as no surprise. To appreciate the great strength of Barclays' rock-solid dividend, one must understand how its payment is covered by free cash flow. Such a matter is understood by the bankers of Citigroup, men like Frank Zarb, who built that bank.

It is not thoroughly understood at the lower levels in the financial world, but it is not beyond the comprehension of the inquiring, ordinary mortal eager to make a legitimate profit. He must care strongly about making a profit and not just walk timorously into a broker's office.

We define free cash flow as operating cash flow less interest, tax and capital expenditure. This is not easy to measure in the case of banks as their cash is their stock-in-trade. Vast sums coming in on deposit and going out as loans dominate their cash flow statements.

When one makes these adjustments, surprising results are discovered on how far dividend payments are covered by free cash flow. The greatest contrast of all as regards this ratio stands between Lloyd's Bank and Barclays. This was denied in an implicit way by the reliable Investors Chronicle on March 24, by giving a feeble Barclays 'hold' recommendation.

This was just a few weeks after Bloomberg Money published its glowing 'growth' report. This is not to dismiss the Investors Chronicle as unreliable.

Play of words

The Lex column of the Financial Times is perhaps the most carefully written piece of newspaper writing anywhere in the world. When one reads the autobiographies of British ministers of finance, one finds flagrant admissions that they were anonymous contributors to that column.

The advice that comes out of the Lex column is not blatant. It gives financial advice with the composure and innuendo of a banker sitting on his leather armchair in a London club sipping his pink gin. In the Lex column financial work becomes a game, which achieves its purpose with all the arts of civilisation.

We must recreate that aspect of high finance in Malta, for the very safety and efficiency of our banking system. This is also in the very interest of the proletariat. The more knowledge about a share price is diffused, and the more it is propagated avoiding sensationalism, the less is the chance of a financial conspiracy among bankers against other members of the community. Knowledge is the basis of transparency.

The Lex column article on Barclays of August 6 was the highest expression of a civilised approach in the formulation of financial advice. This was marked by a brilliant play of words, which avoided a smug attitude of prescience, but at the same time left the knowledgeable reader in no doubt as to where the true convictions of the writer lie.

One cannot read the Lex column and doubt that the Financial Times thinks that Barclays has growth potential. The FT spoke out: "Few investors think of Barclays as a growth business, risk-weighted assets up 20% in the first six months of 2005 and revenues increasing by 14%, this is an increasingly apt description.

"Most important, the bank is expanding profitably. Return on equity is a fat 23% and this half's £2.7 billion pre-tax result was well ahead of expectations."

Comparing the Whiterow forecast of a probable Barclays yearly profit of £5 billion with the actual half yearly recorded profit of £2.7 billion, and we realise how justified the Lex column has been to describe this result as "well ahead of expectations".

Investment banking

Perhaps the greatest sign that Barclays can soon be one of the top investment banks in world comes from the fact that most of the credit for its expansion comes from that area. This is in line with the likes of Deutsche Bank, which derives only 29% of its revenues from Germany.

As regards investment banking, Barclays is beating HSBC hands down. HSBC saw an 18% decline in that area in the first half, while Barclays increased its profits in that sector by a fifth.

The FT's conclusion was that Barclays earnings at a 2006 multiple of 10 times earnings was a very interesting proposition. What an understatement!

John Azzopardi Vella advised Standard and Poor's and promoted the Malta Development Fund. At present he is executive manager with DBR Investments. E-mail: johnazzopardivella@hotmail.com.