Barclays is the most attractively valued UK bank, offering the best potential for growth if it restructures its investment banking division, according to J.P. Morgan Cazenove.
A new research note from the group said Barclays is its preferred UK domestic bank, with shares trading at a 25% discount to the broader sector.
It said on a three-and-a-half year time horizon, Barclays is the most attractively valued of all the UK's listed banks, with plans to restructure its investment banking arm providing a raft of opportunities to generate shareholder value.
"We believe Barclays remains the best positioned of the UK domestic banks to grow and improve its implied cost of equity (CoE) through balance sheet reductions and cost cuts," J.P. Morgan Cazenove's analyst Raul Sinha said.
"With capital being addressed, we believe Barclays offers the best relative risk/reward within UK banks, with 50% upside in a full restructuring scenario."
The note put forward a case for a significant restructure of the bank and suggested the current model, following the acquisition of the Lehman Brothers business in 2008, is too dominated by the investment bank.
"The rise in the share of investment bank profits has resulted in a significant de-rating of the shares as both return on equity (RoE) and cost of equity (CoE) for investment banking have headed in the wrong direction," he said.
"In our view, the key driver for the valuation discount is that Barclays is currently too dominated by the investment bank (IB) whose returns are under threat from regulation. The IB consumes 51% of group capital on a Basel III basis, and is likely to deliver returns 2% below its CoE of 12% in 2013."
Sinha added while a restructure of the investment bank would result in an initial outlay, and could impact revenues in the near term, longer term it should please shareholders.
"While this may imply lower revenue near term, we believe both shareholders and regulators are likely to be in favour of a reduction of IB assets to drive higher group RoE and lower CoE long term in a UK context," he said.
In terms of headwinds, the group warned Barclays remains at risk from the LIBOR scandal, but it said with valuations where they are, the stock looks attractive regardless.
"We do not expect any quick fixes, but assuming capital is allowed to be addressed via CCNs, we see valuations at 0.6x total book value as already reflective of the downside risks to returns/earnings."
Post restructure, J.P.Morgan Cazenove added the bank's share price - currently at 242p - could climb to 320p.
Such a price would mark a significant gain for Barclays, which peaked at 287p in May, before slumping to a low of 150p in July after being fined by regulators over the LIBOR scandal.
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