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Do investment bank job cuts make Barclays a buy opportunity?

Do investment bank job cuts make Barclays a buy opportunity?

It has been an eventful week for Barclays as it tries to restore its reputation following a series of scandals.   

At the start of the week, it was revealed the chief operating officer of its wealth arm had been given his marching orders after shredding a ‘secret’ report which claimed the division was out of control.

Barclays' chief executive Antony Jenkins is also reported to have warned staff to improve their ethical code or pack their bags after the news broke.

In an unconnected event, it has since emerged the bank told around 10,000 of its London employees across the wider bank that their jobs were not safe and that up 2,000 jobs from its investment arm could go.

The overhaul is being led by Jenkins, who took the helm after his predecessor Bob Diamond resigned following the Libor scandal last summer.      

The market has reacted positively to news of a possible jobs cull,  with shares by midday rising 1.2p to 297.3p. Despite the constant controversy surrounding the bank recently, shares in Barclays are now just shy of their 12-month high of 299.7p.

Investec Securities bank analyst Ian Gordon believes the stock remains a buy opportunity after its strong run, repeating his 320p price target.

In a note on the bank Gordon pointed out the job cuts is not ‘new news’ and that the market is underestimating the positive impact the move will have.

‘We knew that this procedure was coming and, in our view, only a relatively small proportion of this number will be heading out the door,’ Gordon said.

‘However, what it does bring home is that consensus still appears to underestimate the material benefit that will flow through the Barcap cost line as headcount and pay are rebased to the benefit of the shareholder.’

Gordon expresses ‘incredulity’ that at the start of the year the sell-side consensus predicted Barcap costs would rise from £7.2 billion in 2012 to £7.5 billion in 2014, versus his expectation of costs falling to £6.8 billion over the next two years.

'Given an expectation of a reduction in both overall headcount and cost per head, we regard this as unrealistic and expect Barclays to deliver a much more shareholder-friendly, (and politically expedient), outturn,' he said.

However, Gordon was more cautious on those who believe its investment bank arm will continue to rake in revenues as others pull out of the sector.  

‘Despite an assumption that Barcap will continue to enjoy ongoing market share gains as others retrench and/or exit, we do expect a modest adverse revenue impact in 2013e (as much driven by industry evolution as headcount rationalisation),’ Gordon said.  

‘Indeed, our 2014e Barcap revenue forecasts are down 1% versus 2012e. Consensus is more optimistic, and such optimism supports a recent crop of quite frothy target price inflation.’  

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