Sunday, June 19, 2016

Analysis of Barclays

Please read the disclaimer here: Enjoy the article, bitches!


Whaddup guys, how have y’all been holding up? I wasn’t active the past 2 months because I recently got myself a PS4 and I have been playing video games non-stop. I couldn’t hold off buying a PS4 any longer because Dark Souls 3 came out, and my life would feel utterly empty if I knew that Dark Souls 3 was out there and I wasn’t playing it. Anyway, this article will take a look at Barclays, one of the newer additions to the Greedy Dragon portfolio. I bought the ADR instead of the shares listed on the London Stock Exchange because I don’t know how to read a stock’s price in pence or whatever. I guess I’m just stupid like that. Like other UK stocks, Barclays has been hit hard recently by Brexit fears. Them skittish mofos selling out of their UK stocks are acting like the UK is going to suddenly become some fucking third world country once it leaves the EU. I will talk a little bit about this Brexit later in the article. Some other factors which I presume contributed to the stock’s weakness are the dividend cut and losses associated with the group’s non-core division which is tasked with exiting non-strategic businesses.  

Update on the Greedy Dragon portfolio: Other than buying 200 shares in Barclays, I recently sold 300 shares in Northern Oil & Gas, sold 100 shares in Natural Resource Partners, bought 500 shares in Kerry Properties, and bought back 300 shares in Northern Oil & Gas

Barclays is a bank with global operations. As at December 31, 2015, the group’s on-balance sheet credit risk concentrations by geography were as follows: UK 40%, Americas 28%, Europe 23%, Africa & Middle East 5%, Asia 4.5%. Barclays’ adjusted profit attributable to shareholders was £2.69 billion in 2015. According to google finance, the group had a market cap of £28 billion as at market close on June 17. This would give the stock a Price/Earnings ratio of around 10.4. This is attractive especially if you consider that profits are weighed down by a loss before tax of £1.46 billion from the group’s non-core division. The losses from the non-core division should go down over time as the group continues to wind down its non-core businesses and assets. Barclays’ core division generated £4.21 billion in profits attributable to shareholders and achieved a decent return on average tangible equity of 10.9%.

Excluding other equity instruments, other reserves and non-controlling interests, the group had equity of £52.6 billion as at December 31, 2015. With Barclays’ current market cap of £28 billion, it’s like buying a dollar for like 53 cents right? Well, not exactly. There is always the risk that the group’s assets could drop in value and wipe out the equity. The assets don’t even need to drop by £50 billion for shareholders to get wiped out. If Barclays’ capital ratios drop below a certain level, the group could be considered insolvent and shareholders could lose most if not all of their investment. That’s why it’s important to pay attention to shit like asset quality and capital ratios.

As at December 31, 2015, problem loans made up 1.8% of total loans (the annual report calls these loans credit risk loans, but I’m going to refrain from calling it that in this article so people don’t confuse it with credit risk exposure). The group’s problem loans coverage ratio was 63.0%. If you include potential problem loans in the equation, the coverage ratio goes down to 49.9%. Debt securities made up roughly 13% of the group’s exposure to credit risk as at December 31, 2015. Approximately 70% of the group’s debt securities consist of government securities. Barclays has very little net on-balance sheet exposure to Cyprus and Greece. The group’s fully loaded common equity tier 1(CET1) ratio stood at 11.4% as at December 31, 2015. Barclays need to have a CET1 ratio of 9% plus a Pillar 2A add-on by 2019. For 2016, Barclay’s pillar 2A requirement is 3.9%, 56% of which will need to be met in CET1 form. Assuming the requirements stay the way they are, Barclays would need a CET1 ratio of around 11.2% (which it already has) by 2019. Overall, I think Barclays has done alright managing the risks of its loans and securities portfolios. I also think that the group has an adequate capital cushion to absorb losses.

So, what do I think about this Brexit? I think that the UK would be way better off over the long-term if it left the socialist hell hole which is the EU. Sure, the stock market might go down in the short-term. The economy might even take a hit if the EU imposed tariffs on UK goods, and some companies reallocated some of their UK operations. But over the long-term, I think the UK will have a significantly stronger economy without the EU anchor dragging them down. Shieeet, the UK could experience an economic renaissance if it actually started deregulating its industries, lowering taxes and cutting government spending on shit that has nothing to do with protecting individual rights. But who the fuck am I kidding? That’s just a pipe dream right now.

I didn’t know Brexit was going to be as big as it is for the equity markets. Hey, I mostly watch Bloomberg because I find Alix Steel hot. That gal is cute, smart, and I like how excited she gets when talking about oil. So, forgive me for not noticing something like Brexit. Aight guys, thanks for sticking with me till the end of this article. Take care and stay rational.