Barclays Plc. (BCS) is contemplating a retreat from trading in agriculture commodities, according to a Reuters report. The move comes as the company gears up for a strategic revamp of its overall business as well as to avoid any threat to its reputation.
Notably, trading in agricultural commodities has received much criticism in the recent years as the speculation activity has been blamed for a shoot up of prices. This has had severe consequences in the undeveloped countries, leading politicians as well as common people to raise their voices in protest.
As a matter of fact, a number of scandals has hit hard Barclays in recent times, most notable being the payment of a penalty for manipulating Libor rates earlier this year. However, to recoup its lost reputation amidst a challenging macroeconomic scenario, tougher regulatory environment, as well as stricter capital norms, the company has already initiated a thorough review process under the new Chief Executive, Antony Jenkins. Each business line is being reviewed and its potential impact on the company’s reputation is analyzed.
Apart from this crop trading business, Barclays’ tax advisory business has gathered much criticism and though the two unit contribute well to the company’s revenue, their potential risk to the company’s reputation might lead to the termination of such business.
Over the past several years, Barclays, Deutsche Bank AG (DB), JPMorgan Chase & Co. (JPM), The Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) have ruled the commodities trading business. Barclays has generated significant revenue from its commodities trading business. However, in the recent past, turnover in this business has declined for the macroeconomic environment and further regulations are expected to restrict the growth prospects of this business.
We believe that in a challenging operating environment with revenue headwinds, the reputation of any company is of utmost importance from a competitive point of view. Therefore, reviewing the crop trading business based on reputational aspects is a strategic ploy on Barclays’ behalf.
In addition, considering the fact that this business consists of a lesser fraction of the overall commodity trading business, the impact on the company’s top line would be insignificant. Therefore, for Barclays, which currently retains a Zacks #3 Rank (implying a short-term Hold recommendation), there are fewer opportunities for estimate revisions in either direction.
Further, we think that any announcement of a major overhaul of Barclays’ business might push up its estimates going forward. One of Barclays’ rivals, UBS AG (UBS) has announced a major revamp of its business in the recent past, including the split of its investment banking unit and significant layoffs.