Situation abnormal

Barclays is in an ugly fix. The rate-rigging scandal has laid waste to the bank’s senior leadership and trashed its reputation with regulators, politicians and customers. Barclays shares have slumped to barely half the average traded price over the last 12 months. There are plenty of reasons to be wary. But a ‘normalised’ Barclays could offer investors some striking gains.

Breakingviews’ latest calculator compares Barclays’ current rating to that of its largest global rivals. Based on a blended average of three closely watched metrics — the earnings multiple, dividend yield and price to book ratio — the British bank was trading at a 38 per cent discount to its peer group on July 20.

There are many good reasons why the discount is justified. Following the departures of Bob Diamond and Jerry del Missier, Barclays has neither a chief executive nor a chief operating officer. Marcus Agius, the chairman, is also on the way out. No recovery is possible until the bank recruits new leadership.

But just installing a new CEO is no guarantee of a revival. The row over manipulation of interbank lending rates has exposed regulators’ broader concerns about the bank. Adair Turner, chairman of the UK’s Financial Services Authority, wrote to the Barclays chairman in April this year expressing his worries about the “aggressive…interpretation of rules and regulations.” Barclays’ depressed valuation suggests investors share those doubts.

The scandal has also revived political demands for a complete separation of retail and investment banking. That would destroy value for Barclays, as its investment bank would face higher funding costs on its own than as part of a larger group. But the bank’s ability to resist such a move may be limited.

More generally, the economic outlook in Barclays’ European backyard is another drag on valuation. While US peers are hardly in clover, they currently enjoy a more benign economic and regulatory environment.

Given its current woes, it is hard to argue that Barclays shares are undervalued. But it is unlikely to be a laggard forever. Just returning the bank’s valuation to the average of its peers would offer substantial upside. All the more reason for the board to get on with the task of normalising Barclays.