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LONDON (Alliance News) - Sherborne Investors Management LP has sent a letter to Barclays PLC shareholders requesting they vote in favour of electing Edward Bramson as a non-executive director at the lender's annual general meeting May 2.
Activist investor Bramson has long been demanding Barclays scale back its investment banking business, and will be standing at the May AGM hoping to get a seat on the board.
Bramson spent about GBP900 million in March last year to build a 5.5% stake in Barclays through his investment vehicle Sherborne Investors. He was previously re-buffed in an attempt to get a seat on the board in December.
In the letter to Barclays shareholders, Sherborne outlined its issues with Barclays' current strategy of committing "significant" resources to its Corporate & Investment Bank, put in place when current Chair John McFarlane was appointed in 2015.
Barclays has asked shareholders to continue to endorse a "persistent and diligent execution of [this] strategy…to drive greater returns for shareholders", but Sherborne noted Barclays negative shareholder return in that period, underperforming peers.
Since 2015, Barclays has had a negative 29% total shareholder return compared to an average positive 3.1% from UK peers HSBC Holdings PLC, Lloyds Banking Group PLC, and Royal Bank of Scotland Group PLC.
The average shareholder return of investment bank peers, Bank of America Corp, Citigroup Inc, Goldman Sachs Group Inc, JP Morgan Chase & Co and Morgan Stanley, is a positive 74%.
Sherborne said: "A comparison with the peers makes it clear uncontrollable factors, such as Brexit, do not account for Barclays' underperformance. The cause is, we believe, the board's prolonged pursuit of a strategy that is not grounded in the fundamental realities of the global Corporate & Investment Bank marketplace.
"The board has not offered any credible reason to believe persisting in this strategy will produce better results for shareholders in the future than it has since its inception, as even the modest 2018 return on group tangible equity of 8.5% was achieved only because of non-recurring items that, by our estimate, added more than GBP700 million to profit before tax for the year.
"We are also concerned that the Corporate & Investment Bank's long-term competitive position remains strategically weak," Sherborne continued.
Sherborne believes a "thoughtful reassessment" of Barclays "underlying strategic assumptions seems to be overdue".
The lender recently restructured its Corporate & Investment Bank, splitting the business into three units: Global Banking, Global Markets, and Corporate Bank. The units will remain connected but report directly to Group Chief Executive Jes Staley.
Shares in Barclays were down 0.1% Monday at 162.56 pence each. In the past 12 months, the lender's shares have decreased 23%.
Sherborne believes the market's evaluation of Barclays reflects the "growing risks the Corporate & Investment Bank poses to Barclays' overall financial position".
The activist investor feels the "market does not share the board's optimism the hidden merits of its strategy will eventually become apparent".
Sherborne said continuing on the same strategic path could see the "real threat that more new capital will need to be raised to underpin the activities of the Corporate & Investment Bank".
"We believe any new capital invested in the Corporate & Investment Bank is almost certain to cause an immediate destruction of shareholder value, as it would be valued in the market at significantly less than the amount invested in it, which we also believe is true of the capital invested in the Corporate & Investment Bank today," added Sherborne.
Sherborne is also worried the risk the Corporate & Investment Bank poses to the bank's balance sheet. Barclays is a holding company with two main banking subsidiaries, Barclays Bank UK PLC and Barclays Bank PLC.
Both of these subsidiaries are, as required by regulation, well capitalised as they benefit from about GBP90 billion of loss absorbing capital provided from parent Barclays PLC, which is the legal entity shareholders own directly.
The subsidiary banks have credit ratings of A1 and A2, respectively. Barclays PLC, noted Sherborne, is in a "weaker position than its subsidiaries", as it has "only some GBP40 billion of its own eligible shareholders equity", meaning it is borrowing the balance of the GBP90 billion it has provided to its subsidiaries.
Sherborne said: "The risk to shareholders from the resulting parent company gearing is magnified by the low returns of the Corporate & Investment Bank, which absorbs the majority of the group's capital."
Barclays' current Moody's senior unsecured credit rating of Baa3 also worries Sherborne, saying it is "notably the weakest among global peers and represents an increasingly imminent risk to shareholders".
Any further reduction would leave Barclays with a non-investment grade bond rating, which Sherborne said is "unthinkable".
Sherborne added: "Investors might be expected to accept higher financial risk in the near-term if it seemed likely that long-term returns would compensate them for doing so. Based on the current Corporate & Investment Bank strategy, this seems implausible to us and to other investors."
