Barclays admits it will not meet 2020 profitability target

“Just when closure on the PPI scandal could have bought Barclays some breathing room, the bank will now attract lurid headlines over the relationship between chief executive Jes Staley and disgraced American financier Jeffrey Epstein. But the real shocker in today’s full-year results is Barclays’ admission that it will not meet the 10% return on tangible equity target laid down by Mr Staley and CFO Tushar Morzaria for 2020,” says Russ Mould, AJ Bell Investment Director.

Source: Company accounts. Excludes litigation and conduct costs. 2016 figure refers to ‘core’ Barclays only.

“While investment banking revenues rose 20% year-on-year in the fourth quarter and pre-tax income from corporate and investment banking rose to £359 million from just £85 million a year ago, activist Edward Bramson will still be able to point out that the investment bank made only a 7.6% (adjusted) return on tangible equity from its allocation of £25.9 billion, while the group overall made 9% on £46.6 billion.

Source: Company accounts

“Meanwhile, Barclays’ headline pre-tax profit figure of £4.4 billion including litigation and conduct costs and £6.2 billion excluding them shows what the bank could achieve if it can keep its nose clean. After an extra £1.8 billion of payment protection insurance (PPI) compensation payments, Barclays has now forked out £15.5 billion in conduct fines and costs since 2013. Throw in £16.2 billion of asset and loan write-downs and £4 billion in restructuring costs over the same period, and then these three items combined have knocked £32 billion off profits, when Barclays’ aggregate pre-tax income has been £16 billion and its dividend distributions have come to £5.4 billion. The upside potential is huge if those costs come down, especially as deposits and the loan book are growing again.

Source: Company accounts

“However, the bad news is the overall backdrop is not helpful. Low or negative interest rates, flat yield curves and compressed credit spreads make it very hard for Barclays to earn a decent return on its loan book, as can be seen in the ongoing decline in the net interest margin at the UK operation.

Source: Company accounts

“The longer that interest rates and bond yields stay low, the harder it will be for Barclays to make a return on its loan book and meet the 10% (adjusted) return on tangible equity target.

“The failure to reach that level leaves Barclays shares bereft of a catalyst that could crystallise the value that may be there. A share price of 176p compares to the bank’s stated tangible net asset value per share figure of 262p, so investors are, in effect, paying 67p to buy ever £1 of the bank’s assets.

“In addition, the shares offer a yield of more than 5%, based on analysts’ forecasts of a further hike in the divided to 9.6p a share in 2020, from 9p in 2019.

Source: Company accounts

“A fresh intervention from Mr Bramson could perhaps provide a spark, although an improved global growth outlook with a little inflation and some interest rate rises thrown in would perhaps be the best thing that could happen to Barclays’ shares – unlikely as perhaps that may seem at the moment.

  P/E 2020E Price/book 2019 Dividend yield 2020E Dividend cover 2020E
HBSC 10.9 x 1.06 x 6.7% 1.38 x
Lloyds  8.1 x 1.09 x 6.2% 2.00 x
Royal Bank of Scotland 9.1 x 0.83 x 5.6% 1.94 x
Standard Chartered 9.4 x 0.65 x 3.9% 2.75 x
Barclays 7.5 x 0.67 x 5.5% 2.44 x

Source: Sharecast, consensus analysts' forecasts, company accounts. Price/earnings and yield based on 2020 consensus. Price/book based on last published book value per share figure

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.