-- Margaret Doyle is a Reuters columnist. The opinions expressed are her own --
By Margaret Doyle
LONDON, June 12 (Reuters) - Barclays' decision to sell its asset management arm -- until recently one of its crown jewels -- to BlackRock Inc. underscores the new realities facing banks.
As long as Barclays does not redeploy the $6.6 billion in cash it pockets as part of the $13.5 billion sale, the deal will dilute earnings per share -- by around 5 percent, analysts reckon. John Varley, Barclays' chief executive, has clearly chosen capital strength over earnings. This is the right call.
During the go-go years, banks' share prices were closely correlated with earnings. However, since the crisis began, and especially since Lehman collapsed last September, shareholders have been much more focused on capital ratios.
This bias may fade somewhat as the crisis eases. But investors will favour banks that are well-capitalised over those that are not for many years to come.
There may be other factors at play. Bob Diamond, Barclays' president (who makes a 16 million pound profit in the deal from his BGI shares), on Friday made much of the trend for fund managers to be run independently of banks.
This is being exacerbated by regulatory pressure, especially in the United States. With its recent Lehman acquisition in North America, Barclays found itself on the buy side and sell side of equity flows far more than is comfortable in the long run. Moreover, there is evidence that independent fund managers do a better job running money than bank-owned managers.
This is partly reflected in the discount applied to the shares of bank-owned managers over those of independent firms. BGI last year accounted for 15 percent of Barclays' profits, but the sale values it at 28 percent of the bank's market capitalisation.
However, the difference between the multiple applied to BGI and the rest of Barclays' profits also reflects a more fundamental preference by shareholders for stable, predictable earnings over the cyclical profits (and losses) that banks deliver. Investment banking earnings are even more volatile than those generated by regular retail and commercial banking.
Barclays Capital accounted for around half of the bank's total underlying earnings in the first quarter. And with the volatile conditions that generate fat profits for investment banks set to continue, alongside weak performance in Barclays' retail and commercial banking arm, that dominance will last for some time yet.
The paradox of Barclays' position is that it has sold a stable business in order to make itself safer. But the capital buffer it now enjoys is all the more necessary to support what is now a riskier business.
(For a take a look on the deal:
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