Recently, I wrote an article about the potential value opportunity in the British bank Barclays (BCS -1.75%), which is largely involved in investment banking and consumer banking in many parts of the world including the U.S. and Europe. Currently, the bank trades at the very low valuation of just 53% of tangible book value (TBV), which measures what a bank would be worth if it were immediately liquidated.
Now the British lender has traded at a low valuation for a long time, so I can understand the skepticism about its stock. Yet management believes the bank can generate a 10% return on tangible equity this year, which is the technical return Barclays expects to make on shareholders' equity minus goodwill and intangible assets. The bank has also been buying back stock over the last year for the first time in a while, which can help the stock a lot at its current low valuation. But recently, I have come across another reason that continues to support my stance on Barclays.
Achieving scale in the U.S.
Since the end of 2020, foreign banks have been exiting and selling their consumer banking operations in the U.S. The Spanish lender BBVA (BBVA -1.59%) announced that it would sell its U.S. operations to PNC Financial Services Group (PNC -2.02%), and HSBC (HSBC -2.27%) announced it would sell most of its U.S. consumer bank to Citizens Financial Group (CFG -1.79%). More recently, the Japanese bank Mitsubishi UFJ Financial Group Inc (MUFG -1.71%) announced it would sell to U.S. Bancorp (USB -1.06%), and in a smaller deal, the Israeli bank Bank Leumi Le Israel announced it would sell its U.S. subsidiary to Valley National Bancorp (VLY -2.96%).
Barclays, on the other hand, has been going in the opposite direction by investing and continuing to grow its U.S. consumer franchise and making it a key part of its core strategy. Barclays has a large international corporate and investment banking arm that does a lot of business in the U.S. In fact, Barclays was ranked sixth in terms of global markets revenue, the largest non-U.S. bank in the category, and seventh in global banking fees.
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In its retail banking operations in the U.S., Barclays offers credit cards, personal loans, and savings accounts and certificates of deposit.According to the Federal Deposit Insurance Corporation, the bank had roughly $28 billion in total assets in its U.S. operations at the end of the second quarter of this year, roughly $20 billion of which were tied up in credit card loans. Barclays' main strategy in the U.S. is to partner with large corporations to sell credit cards to consumers through those partnerships. Some of the brands they partner with include Carnival Corp (CCL -1.14%), Barnes & Noble (BNED -64.29%), JetBlue (JBLU -3.83%), and the NFL.
Barclays CEO Jes Staley on the company's recent earnings call essentially said that its strategy is to translate business with its corporate clients in its investment banking into credit card partnerships. Then it helps these partners manage the issuing of the credit cards, and takes on the debt from the credit card loans. Barclays can also do co-branded cards. A lot of banks in any foreign market, whether it's the U.S. or another country, are realizing that you need scale to really compete and put up good returns, which is likely why so many foreign banks are leaving the ultra-competitive U.S. banking market. But with this credit card partnership model, Barclays has achieved scale and is a top-10 credit card issuer in the U.S., according to the bank.
Improving results and growth
Barclays' U.S. banking operations fall under the bank's international consumer, cards, and payments business division, which Barclays operates in other countries in addition to the U.S. The group overall is rebounding after struggles during the pandemic. The unit, which also includes banking services in other countries, generated 840 million British pounds in the first half of 2021. That's equivalent to a nearly 22% return on tangible equity, although part of that was due to release of reserve capital previously stored away for loan losses.
The other thing is that consumer spending in Barclays' U.S. cards business still hasn't quite recovered yet. Staley said U.S. card spend has almost recovered to 2019 levels, which I find a little odd because consumer spending is up close to 20% versus 2019 at other U.S.-based banks like Bank of America (BAC -3.53%) and JPMorgan Chase (JPM -1.14%). However, Barclays management said U.S. card spend was up 21% versus the first quarter of the year, and they are encouraged by the signs they are seeing, so perhaps there is some kind of lag in their business.
The other good news is that as all of these other foreign banks pull out of the U.S., Barclays is looking to grow and invest in its U.S. franchise. Recently, the bank announced that it had acquired a nearly $4 billion credit card portfolio associated with the clothing retailer Gap (GPS -4.11%). Barclays also recently inked a co-branded credit card agreement with Gap that kicks off in 2022.Barclays management also sees a 900 million British pound opportunity in payments over the next three years, and is heavily investing in that business. Recent investments include a new foreign exchange platform to help merchants with e-commerce; the bank is also working on a new platform to better help merchants connect with customers.
Another reason to buy
It's always tough to get behind a bank stock that has seen its stock price plunge over the last decade, but it really seems like Barclays is starting to get it together when you consider the returns it is targeting, the capital it has built up, and the fact that is repurchasing shares while trading below tangible book value. I think the continued investment and growth strategy in the U.S. as other foreign banks pull back is just another reason that reinforces my thesis on Barclays.
