Barclays PLC (NYSE:BCS) (LON:BARC) will announce the intended creation of a bank housing the sub-par returning assets from the investment bank and exit retail assets in non-UK RBB, according to a report from Financial Times.

Jason Napier and David Lock of Deutsche in their report dated April 30, 2014 believe Barclay’s bad bank move would be well received.

Success in other banks

As reported earlier, Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS) said it intended to create an internal ‘bad bank’ which will assume £ 38 billion of bad and doubtful loans / assets. The bank said the action could result in a write-down of up to £4.5 billion in Q4 and adversely impact its capital adequacy ratio in the short term. The bank earlier conducted a review on whether it was practical to transfer these toxic assets to an external bank, but apparently decided that the effort, risk and expense involved was not justifiable.

The Deutsche analysts note given success in bad bank / non-core units at Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS) and LBG, Barclays PLC (NYSE:BCS) (LON:BARC)s’ relatively low valuation multiples, the bank’s bad bank move would be positively received.

Barclays’ divisional estimates

The following table captures the Deutsche analysts’ adjusted forecasts of Barclays PLC (NYSE:BCS) (LON:BARC):

Divisional PBT - Barclays

The analysts note the IB is the key driver of profit decline, largely offset by the rest of Barclays PLC (NYSE:BCS) (LON:BARC). They point out that the investment bank is the driver of the yoy decline in adjusted profit versus a ‘resilient performance’ in non-IB businesses.

The analysts believe if a bad bank is announced, investors would be able to see the return and profit draft in Exit Quadrant Assets, Non-core RBB operations and other IB business which doesn’t meet return hurdles more clearly. They point out that experience at LBG and Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS) encourages investors to back a rapid and capital-effective non-core exit.

Retained EPS estimates

The analysts hope Barclays PLC (NYSE:BCS) (LON:BARC) would choose to talk about lines of business exit / rationalization rather than assets which are non-core in their ensuing meeting during May.

The analysts believe the valuation of the group is so modest as to make it difficult for them to imagine what management could say to take their fair value close to the current share price. The following table captures the Deutsche analysts’ key valuation metrics on Barclays:

Barclays key valuation metrics

The analysts have chosen to keep their EPS estimates unchanged and bad bank expectations modest given that the bank is on track to meet its capital requirements without bigger cuts and the bank’s non-IB divisions can’t absorb much of the £18bn in IB TNAV given their modest capital needs.

The analysts note with unchanged estimates they have on the stock on 7.2x 2015 EPS and at 0.8 times TNAV for an 11% forward ROTE.