UK Edition
Questor: it’s time to buy Barclays – the shares look cheap and profits are on the road to recovery
It has been a rare week for banking headlines because Barclays made so few of them. For one of UK plc’s most engaging corporate sagas, that is quite a result. Instead, Royal Bank of Scotland’s settlement with US regulators and developments among the “challenger” banks took centre stage.
The proposed union of CYBG, the owner of Clydesdale, and Virgin Money is a reminder of how hard it is to forge a credible competitor to the big five. For all the talk of nimble fintech platforms and customer dissatisfaction, the quintet still stand firm with balance sheets rebuilt after the banking crisis and resilient market shares.
The City is warming to the Barclays story but it has had to see past the drama first. The chief executive, Jes Staley, was careless in his pursuit of a whistleblower but has held on to his job after a year-long investigation. That gives the lender some much-needed stability to engage with Edward Bramson, the activist US investor who has bought more than 5pc of the shares and is expected to agitate for yet another shake-up.
On the plus side, Barclays has paid £1.4bn to settle with US authorities over the sale of toxic mortgage-backed securities. However, the Serious Fraud Office’s pursuit of payments made to Qatari investors during a fundraising a decade ago could prove costly, and the tap for PPI redress keeps running.
Beyond the chatter and continuing conduct costs, what appeals now is Barclays’ investment banking franchise. The purchase of Lehman Brothers a decade ago still gives the bank a strong foothold with international corporate clients along the Square Mile-Wall Street transatlantic axis.
It is something that might have been pared back under Staley’s predecessor, the retail-focused Antony Jenkins, but the JP Morgan man has made it central to his strategy. This point of difference from many of its competitors is amplified while the US economy runs hot.
It is even more stark now that Deutsche Bank, the only other European universal bank, has given notice on its global ambition to focus on supporting customers in Europe.
So if Barclays has better times ahead, has Bramson – whose previous targets have been the more modest Electra Private Equity and F&C Asset Management – left it too late to make his move? Hardly. The bank’s potential is yet to be reflected in the share price.
It is a point about which Barclays’ chairman, John McFarlane, does not need reminding. He vowed to double the share price from 260p three years ago – to a height that investors have not seen for more than a decade – but so far it has gone backwards not forwards.
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Encouragingly, the dividend will more than double to 6.5p a share this year, returning it to 2015 levels. There is an expectation of more to come given that Barclays has substantially finished its latest restructuring.
The ringfence around its day-to-day consumer and small business banking activities within a new legal entity has been erected a year early. Now it can get on with the business of capitalising on its strong personal banking and credit card franchises, which are forecast to have steady top-line growth ahead.
In the last quarter, trading was a mixed bag. Profits were ahead of expectations thanks to the investment banking arm but the “core tier 1” ratio, the group’s main measure of financial strength, was down at 12.7pc because of conduct costs.
Staley was confident that it could be rebuilt without much trouble. Similarly, tangible net asset value fell by 25p to 251p to reflect the statutory loss from the US fine plus hedging movements, but analysts at Shore Capital expect it to recover.
With a group cost to income ratio of 63pc, there is scope to squeeze further, which is sure to be one of Bramson’s focuses. From £14.2bn last year, Barclays is guiding to group operating expenses of less than £13.9bn in 2019, which does not appear overly ambitious.
Analysts at Jefferies see £900m in pre-tax efficiency benefits at the investment bank from a combination of cost reduction and revenue generation. Barring any unforeseen drama, earnings and cash returns look rosy by 2020. Trading at eight times next year’s forecast earnings, there is value to be had here as the capital position and dividend are rebuilt.
Questor says: buy
Ticker: BARC
Share price at close: 214.45p