Hanging tightly on to its investment bank in the wake of the last financial crash made Barclays an outlier among the UK lending giants. Now, in the eyes of investors, the FTSE 100 group has become even more of a pariah.
A slump in investment banking fees over the fourth quarter sent the bank’s pre-tax profits tumbling below market expectations for last year. Not surprisingly, volatility has forced corporates to shy away from deal-making and tapping the debt and equity markets for funds. Add in litigation and misconduct charges and £1.2 billion of credit impairments, and pre-tax profit slid 14 per cent to just over £7 billion.
Investors are mistrustful of the corporate and investment banking business. Even in boom times the market is reluctant to ascribe much credit to an income stream that is highly unpredictable, but when said income starts to sag, it is even harder to tolerate a business that incurs higher costs and is more capital consumptive than vanilla retail banking.
Management is still wedded to investing in hiring and technology, which along with inflation pushed operating expenses up by more than a tenth. At a group level, there was no progress on reducing the cost-to-income ratio, stuck at 67 per cent, above a 60 per cent target yet again. Investment banking hardly looks set for a quick rebound this year, which puts the cost ratio in sharper focus.
It is no wonder Barclays’ shares have delivered the sector’s poorest total return over the past two years, half that of competitors like Lloyds and only a third of the likes of HSBC. But its history of underperformance stretches back over a decade.
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A discount of more than 40 per cent against the bank’s net tangible asset value forecast for the end of this year leaves Barclays trailing its peers. Even Standard Chartered has risen ahead of the blue-birded bank, thanks to bid interest from UAE-based lender First Abu Dhabi.
Could bargain-basement Barclays be next for a takeover tilt? The lender is a messier proposition, spanning multiple geographies and lending products, not to mention a reputation for mis-steps and litigious surprises. See the £1 billion blunder discovered last year, issuing about $18 billion more securities in the US than it had permission for.
Rising interest rates have handed UK banks an easy lift to margins. Barclays was no different, unveiling a net interest margin — the difference between what banks pay to depositors and the rates they charge on loans — of 2.86 per cent for its UK operations, up from 2.52 per cent in 2021. That is expected to rise over 3.2 per cent this year. Returns on tangible equity have also topped a target of 10 per cent.
There’s been no sign yet of credit distress or build-up in arrears, says finance chief Anna Cross. But there’s still time. Loan losses are expected to increase to between 0.5 per cent and 0.6 per cent of outstanding loans this year, up from 0.3 per cent last year.
What about the cash returns? The regulatory capital ratio stood at 13.9 per cent at the end of last year, at the top end of management’s target range. That inspired another bump in the final dividend to give a total of 7.5p for last year, which equates to a dividend yield of 4.3 per cent at the current share price. Another £500 million in shares will be bought back, too.
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That equates to roughly 15 basis points of the 13.9 per cent capital ratio, Jefferies says, which looks lacklustre given said levels were 30 basis points ahead of consensus.
Juicy cash returns don’t make Barclays special, even if its cheap valuation does set it apart. The bank looks like it could be a value trap.
ADVICE Avoid
WHY Shaky investment banking operations and a history of underperformance means there is better value on offer elsewhere
Dunelm
Retailers reliant on consumers sprucing up their homes seem ripe for a comedown as consumer finances come under the cosh. Dunelm is defying that logic.
There has been no sign of its customers trading down, according to Nick Wilkinson, chief executive, with the average value of their baskets holding up and no increase in discounting over and above the historic norm. The upshot? Sales over the first half of its financial year were up 5 per cent on the same time the year before and pre-tax profits squeaked in ahead of market estimates.
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That might make investors more at ease with stock levels that sat 14 per cent higher than 12 months earlier. The inflated cost of goods accounted for a mid to high single-digit rise in inventories. Stock stuck in warehouses should come down in the coming months, reckons Wilkinson — a lingering consequence of efforts to navigate supply chain disruption coming out of the pandemic. Still, no retailer is above the risk of higher discounting over the coming months.
Sales ran hot for Dunelm last year as it rode a bounceback in demand after its shops were allowed to reopen after lockdown 3.0. The result is that pre-tax profits are expected to come in at £178 million this year, which would be a decline on the £209 million recorded last year. That is reflected in the descent in the FTSE 250 group’s valuation. The shares trade at 16 times forward earnings, a way below their pandemic peak of around 29.
Cash generated by the business is plentiful, with free cashflow remaining just north of £100 million over the first half of the year That has kept Dunelm in a net cash position, even after spending on its online business.
A special dividend of 40p a share will return the group to a target leverage multiple of between 0.2 and 0.6. Even after paying that one-off, net debt will remain at the lower end of the range, which raises the possibility of another return come full-year results later this year should business hold up.
Take in a total forecast ordinary dividend of 43.45p for this year and that leaves the shares offering a yield north of 7 per cent.
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ADVICE Buy
WHY The shares offer a generous dividend yield
