Bob Diamond stepped down on Tuesday as the CEO of Barclays Bank (NYSE: BCS ) . The move came as a surprise to many, as Chairman Marcus Agius' resignation on Monday was seen as a move to shield Diamond. All of this comes in the wake of a LIBOR fixing scandal that finally broke the levee and sent Barclays' shares plummeting. Given the huge public backlash and the share free fall, now seems like a perfect time to buy in.
The bigness of banking
As of two years ago, Barclays was the fourth biggest bank in the world. It employs 140,000 people in more than 50 countries. Last year, the bank's revenue was $44 billion. Profit was split down the middle between retail banking and investment banking.
U.K. retail banking increased profit by 60%, adding $2.2 billion to the bottom line. In fact, the biggest loser was corporate and investment banking, which saw profits drop 23% in 2011. Overall, Barclays had a 2% decrease in pre-tax profit last year.
But this week's decline wasn't due to an earnings announcement, a change in strategy, or anything related to the ongoing business. It was driven by another "bankers are evil" revelation.
Stupid, stupid, stupid
According to internal emails and testimony, investment bankers at Barclays were actively working to manipulate the LIBOR rate for personal gain. The hubris of the act is staggering. The thought that two people would collude to change an internationally recognized standard to make themselves money is monstrous. Every regulating body seemed to agree, and Barclays was fined a total of $450 million last week.
It originally looked like Agius stepped down so that CEO Bob Diamond wouldn't have to. But Diamond ceded to public and political pressure on Tuesday. He had been the head of Barclays' investment arm when the LIBOR fixing took place, and was promoted to CEO when John Varley left the position in 2011.
To damage further everyone's faith in humanity, it looks like this is just the beginning of a series of trials that could include Bank of America (NYSE: BAC ) , Citigroup (NYSE: C ) , and perennial offender JPMorgan (NYSE: JPM ) , according to the BBC. The banks seem to be nothing if not consistent in their bad behavior. But there is a silver lining here, and there is still a reason to invest in banks.
The mini memoir portion
The first reason that things are looking up is price. Take a look at how Barclays stacks up against its competition, now that the stock has been hit.
2011 Net Income
Average 5-Year Dividend Yield
|Bank of America||8.2||$1.4 billion||3.3%|
Source: Yahoo! Finance.
As you can see, Barclays is trading at a forward P/E of 3.8, much lower than other banks that may be drawn into the fray. With more than $2.4 trillion in assets, the bank probably isn't going away anytime soon. But recognize that picking up shares now is a long-term play. While they're heavily discounted, I can't imagine any scenario in which the stock pops suddenly. This is a slow-grow situation.
While investing in banks may seem like dancing with the devil, I'm happy to vouch for the people on the retail side of Barclays. I worked with them for three years, and they worked hard to provide good products, and that side of the bank has stayed relatively clean during the whole crisis. As an added win, since 2009 pre-tax income has grown 32%, in the retail and commercial business. Not bad at all.
What to watch for
Barclays has a good deal of continental European exposure on its balance sheet. While Greece only makes up $165 million in loans, Italy and Spain combine for a whopping $81 billion. Of that amount, $47 billion is in residential mortgages, which probably are mainly second homes. If you're concerned about Europe, this isn't going to help you sleep at night.
Barclays may also fall further as the LIBOR scandal continues to unfold and encompass other banks. If another big international bank like Citi or HSBC gets hit, Barclays may drop on the spillover effect that would be created.
There are plenty of smaller banks that haven't been implicated in the LIBOR scandal, and the Fool has a special free report focusing on some of the best. You can get your copy of "The Stocks Only the Smartest Investors Are Buying" and get an insight into these companies today. Get your free copy now.