James Moore: From an ethical view, you must dump Barclays

Investment View: Barclays is suffering because its head is first on the block... attention will shift to competitors
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The Independent Online


Our view Sell

Share price 165.6p (-30.5p)

Barclays has not been the best call that this column has made.

In February when I last looked at the stock it stood at 236.95p and I said hold.

So I'd have said oops even before the shares took a bath as a result of the £290m in fines it will have to pay for fixing Libor interest rates.

But the financial argument for holding Barclays when I last looked stood up well. The shares were very cheap on pure valuation grounds trading on just 0.61 times the forecast value of its in-force businesses (book value), 6.3 times forecast earnings with a 3.2 per cent prospective yield.

With the shares having fallen sharply since then, the valuation metrics look even more compelling. Barclays trades on about 50 per cent estimated book value, a multiple of about 5.5 times this year's forecast earnings with a yield (forecast) of just above 4 per cent.

That looks very, very cheap.

What's more, the financial impact of the fines, even though £290m appears to be enormous, is actually very limited. It equates to about a week and a half's profits or 2p a share, so even though the cost of it will be borne by shareholders, and not by the perpetrators, it's a slightly bruised rib rather than a broken one.

Worth a speculative punt then? Hold your horses. There are equally compelling reasons for hanging back. For a start, Barclays could face further fines from other regulators around the world, although it is probably fair to say that the worst from that quarter is over.

What has barely got started are the civil law suits in the US. These will take an awful lot of time, including management time, cost an awful lot of money, and will likely result in further, substantial, one-off hits to earnings looking forward.

Then there is the management issue. Barclays right now gives every appearance of a bank in chaos. The pressure for heads to roll is only going to grow over the coming weeks and months. Will Barclays chief executive Bob Diamond and its chairman, Marcus Agius, be able to resist the clamour for resignations? That has only just got started and it's an open question right now. The public outrage surrounding what went on will surely demand some form of sacrifice. And who would take over if one or both of these two men go?

Ah, but before heading for the exit Barclays still has one string to its bow: it's not alone. Others are likely to face similar pain, and indeed the US Justice Department highlighted its exceptional co-operation when its investigations started. Co-operation presumably not so forthcoming from rivals.

Barclays is suffering right now because its head is first on the block. If it can weather the storm attention will shift to its competitors. There will be breathing space.

This column is unique among newspaper tipping services in that it considers the ethical dimension of an investment. As I've discussed before, this is always something of a grey area because what some would consider unethical (say gambling) others don't have any problem with.

But what about a gambling company that plays with a stacked deck, rigging events in its favour?

The sort of person who likes a bet and therefore views gambling companies as a legitimate investment (I count myself among them) would be appalled at that sort of behaviour and run a mile. Isn't this what Barclays was doing?

From an ethical perspective the advice is clear. Sell.

From a purely financial perspective the judgement is more finely balanced. However, this sort of scandal rarely closes in one act. Usually revelation piles upon revelation, political pressure builds up, heads roll, the authorities drop a ton of bricks.

Barclays shares are going to remain under pressure for some time as a result. The current furore will eclipse factors such as an extremely cheap-looking valuation. The shares can't help but remain pressured.

So sell, until such time as one or two of its UK-listed rivals are hauled over the coals. Then, if you have no truck with ethical investment, consider buying back into Barclays.

As for Royal Bank of Scotland, HSBC, and Lloyds, now might be a good time to pull out of them too until we have a better picture of where they sit in this tawdry affair.