Lower charges, higher profits and an end to the bad bank all boost Barclays

“Barclays is joining Lloyds in investors’ good books, even as HSBC languishes in the doghouse, as lower compensation restructuring and compensation costs, improved profits and the faster-than-hoped liquidation of its ‘bad bank’ assets leave it shares near the top of the FTSE 100 leader board," says AJ Bell Investment Director Russ Mould.

“In contrast to HSBC, and like Lloyds, Barclays has produced a marked increase in stated profits, helped by a substantial decline in the ugly, (allegedly one-off) items which have dogged its profit and loss account since the first PPI compensation payments in 2011.

Source: Company accounts. Does not feature all one-off items in the accounts. HSBC’s earnings translated from dollars into pounds at year-average exchange rates.

“The sense that Barclays may (finally) be through the worst is enhanced by chief executive Jes Staley’s announcement that the company’s ‘bad bank’, which lost £1.8 billion pre-tax in 2016 and ended the year with £32 billion of risk-weighted assets (or 9% of group total) will be wound down by the end of June, six months earlier than planned.

“And although the FTSE 100 firm has cut its dividend for the second year in row, compared to increases at Lloyds and HSBC, the reduced pay-out of 3.0p compared to 6.5p met analysts’ forecasts and had already been flagged by the bank’s management team a year ago.

“The relief at lower PPI, conduct and restructuring charges is palpable as the shares move higher, and further reductions would go a long way to improving the banks’ profitability, the quality of their earing and their dividend paying potential, not to mention polishing their tarnished reputation.

“The one cloud at Barclays, and for that matter Lloyds and HSBC, is the lack of underlying growth. Stripping out all of the bad stuff and funnies, underlying pre-tax income fell slightly year-on-year at Barclays, Lloyds and HSBC in reporting currency terms (the increase at HSBC comes from the pound’s drop against the dollar).

“This reflects the key challenges which still face the banking industry, namely excess indebtedness in the West, fierce competition and tight regulation which means some profit sources from a decade ago (payment protection insurance, for example) are no long available avenues for earnings now.

“As such underlying profit growth will be hard to come by and is likely to come from increased risk-taking, either via the lending book (and its expanding credit card operations in Lloyds’ case) or investment banking at Barclays in particular, where rising stock markets are, for the moment, justifying boss Jes Staley’s firm commitment to this operation.

“This is why analysts’ now expect aggregate 2018 earnings from the Big Five to come in below where they were at the height of the pre-crisis boom in 2007:”

Source: Company accounts, Digital Look, consensus analysts’ forecasts. 2016 numbers for RBS and Standard Chartered are still estimates, pending Friday’s results.

These articles are for information purposes only and are not a personal recommendation or advice.