Pressure will remain on Barclays after first-quarter results even if activist plan is rejected

Thursday, April 25, 2019 - 12:10

Barclays’ mixed first-quarter results may not unduly harm chief executive Jes Staley’s efforts to fend off activist investor Edward Bramson, although they may not help much either. All of the £1.8 billion year-on-year improvement in pre-tax profit came from a drop in restructuring, loan impairment and litigation costs as total income fell 2%, weighed down by a 10% drop in business levels at the investment bank, which lies at the centre of the debate over strategy with Mr Bramson.

Leading shareholders and finance industry professionals – not to mention chief executive Jes Staley and the Barclays board – are clearly wedded to the concept of Barclays’ ongoing exposure to investment banking, given the kudos, growth potential and bonuses such operations can bring, so it seems unlikely that Mr Bramson will prevail in his campaign to rethink the operation’s role within the wider bank.

Nevertheless it would be interesting to see what response Barclays would get were it to ask its high street customers rather than its shareholders for their opinion. I suspect you might get a different perspective, with the memories of the crisis of a decade ago still fresh in the minds of savers and mortgage holders. Even allowing for the new ring-fencing requirements that came into force on 1 January 2019 there has to be a chance that many customers would feel Barclays would be better off with less exposure to investment banking, not more.

At Barclays UK, Business Banking performed well, with a 12% increase income, while at Barclays International Consumer, Cards and Payments also pleased with a 6% increase in revenue.

And while income at the investment bank did drop by 10% - thanks to a 21% drop at equities and a 37% drop in corporate lending – fixed-income held up nicely, as revenues grew 4% year-on-year. In addition, Mr Staley will argue that Barclays’ investment banking performance looks pretty good when compared to today’s results from Swiss rival UBS’ equivalent operation today and those unveiled by the American megabanks last week.

Source: Company accounts

Moreover, the group kept its nose clean, with just with just £61 million of litigation and conduct costs, the lowest figure since Q1 2017, and the cost/income ratio rattled lower to just 62% from 99% a year ago as Barclays kept a tight grip on the cost base.

Source: Company accounts

However, Mr Bramson and his supporters will feel there is enough here to justify their claims that change is required.

Although group pre-tax profit surged from a loss of £236 million a year ago to £1,483 million, all of that uplift came from a plunge in loan impairments, restructuring expenses and litigation and conduct costs. There was no improvement in underlying trading and the net interest margin shrank again to 3.18%, down from 3.27% a year ago, at the Barclays UK operation, continuing a seemingly inexorable decline in a low interest-rate world.

Source: Company accounts

In addition, the investment bank will have done little to persuade the sceptics that more work is needed on the cost base, especially as its income stream remains unpredictable and the regulatory capital requirements associated with the business remain lofty.

Whether Mr Staley prevails against Mr Bramson at next week’s Annual General Meeting or not, Barclays has work to do if it is to win over its shareholders. The total return provided by its shares, in local currency terms, since Mr Staley became chief executive in December 2015 pales next to all of its American and British rivals, not to mention the FTSE All-Share.

  Total return (local currency) since 1 December 2015
JPMorgan Chase 86.60%
HSBC   55.80%
Morgan Stanley   48.40%
Citigroup   34.90%
FTSE All-Share 34.00%
Standard Chartered   24.80%
Goldman Sachs   12.40%
Lloyds   7.30%
BNP Paribas -1.10%
Wells Fargo   > (5.2%)
RBS    (9.6%)
S&P Global 1200 Banks index -11.70%
Barclays    (18.5%)
Commerzbank -22.20%
UBS -22.70%
Societe Generale -26.80%
Credit Suisse     (29.2%)
Deutsche Bank -63.90%

Source: Refinitiv data

In addition, at 164p the shares trade at a substantial discount to the first-quarter net asset value (NAV) per share figure of 266p – only Standard Chartered trades with a deeper discount among the FTSE 100’s Big Five. Even if shareholders vote to fend off Mr Bramson next week, they are still giving Mr Staley a message that Barclays is not doing enough to satisfy them.

  2019E P/E 2018 Price/book 2019E Dividend yield 2019E Dividend cover
Lloyds  8.6 x 1.21 x 5.40% 2.15 x
HBSC 11.3 x 1.20 x 6.00% 1.47 x
Royal Bank of Scotland 9.3 x 0.89 x 4.70% 2.28 x
Barclays 7.4 x 0.62 x 4.60% 2.94 x
Standard Chartered 10.7 x 0.60 x 2.90% 3.26 x

Source: Refinitiv data

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


The chart of the week is written by Russ Mould, AJ Bell’s Investment Director and his team.