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Should Barclays Be Split Up?

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LONDON -- Should Barclays (LSE: BARC  ) (NYSE: BCS  ) be split up? According to the Financial Times, that's one idea that some investors have pitched at new CEO Antony Jenkins as he conducts his strategic review into the bank.

They've been impressed by how the share price of UBS shot up some 20% when it announced it was taking an axe to its investment bank, with the loss of up to 10,000 jobs. So cutting Barclays' investment bank -- or packaging it up to spin off in the future -- are two of the more extreme options on the table.

Certainly, some cutbacks in investment banking -- which currently contributes over half of Barclays' total profits -- seems likely. The FT's report is a measure of the scale of expectation that investors have built up for the strategic review. Its conclusions will be revealed next February. If well received, it could lead to a rerating of the shares.

Jenkins has divided Barclays' business into 75 units and is testing each for profitability, capital consumed and reputational risk. Those three aspects are worth examining.

1. Profits
Profitability in investment banking is at a cyclical low. Depressed markets, low levels of corporate activity, and low interest rates have taken their toll, and it's not just UBS that is cutting back. Most investment banks are focusing on their core strengths. But like all cyclical businesses, capacity exits in the bad times, leading to improved profitability for those who stay the course. That's the argument for Barclays to hold on to its investment banking operations.

2. Capital
Capital adequacy is a bugbear for U.K. banks. In addition to pressure from the Bank of England to increase the amount of capital in proportion to their risk-weighted assets, they will be forced to ring fence commercial and investment banking under the Vickers plan. The more that capital is put into silos rather than being generally available to the business, the more capital is required.

The U.S. Dodd-Frank act could result in foreign banks being forced to ring fence U.S. capital. That would hit Barclays, with its large ex-Lehman Brothers U.S. business. On top of that, the EU is devising its own ring-fencing rules. We can guess how sympathetic to U.K. banks those will be!

3. Reputational risk
It's no surprise Barclays is concerned about businesses that pose a risk to its reputation. It joined in the general PPI mis-selling, it led the pack with LIBOR misrepresentation, and it has its own unique threat bubbling away in the form of a Serious Fraud Office investigation into fees it paid the Qatar Investment Authority during its 2008 fundraising. If that investigation comes to anything, it could prove very messy indeed, with the Qataris still Barclays' single largest shareholder...

Rich Ricci, the sole survivor of the triumvirate that built Barclays' investment bank, has suggested the bank's tax-structuring unit may be sacrificed. It would be a sound move in today's climate. Multinationals may shift profits around the globe, and accountancy firms may dream up clever wheezes, but it was the investment banks that built whole financial edifices for tax avoidance, with Barclays at the forefront.

Jenkins has downplayed expectations of major cuts or closures. He talks of "rebalancing" the bank. But then you might expect him to manage down expectations.

One good move already under his belt is the consolidation of Barclays' African interests. The bank is raising its stake in ABSA Bank from 55% to 62% by merging in its directly owned banking operations. It gives Barclays a strong position in the fast-growing region of Sub-Saharan Africa.

If Jenkins can deliver like that in Barclays' other businesses, and he impresses with a coherent strategy in his February review, then Barclays' shares could see a rerating. On the other hand, if he disappoints, then the pent-up anticipation could push the shares down. There's a lot riding on his shoulders.

Bank shares have risen strongly this year, buoyed by diminishing eurozone fears, but they are still unloved by institutions. If Barclays can maintain the momentum of improving operational results, together with a credible strategy for balancing its business risks, then its shares might put in a strong and sustainable performance next year.

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