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Barclays - Shrinking to fit

Steve Clayton | 1 March 2016 | A A A
Barclays - Shrinking to fit

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Barclays plc Ordinary 25p

Sell: 188.68 | Buy: 188.78 | Change 4.52 (2.45%)
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Barclays has announced a new strategy, based on a focus upon UK retail banking and transatlantic commercial and investment banking, with a global cards and payments prescence through Barclaycard. The group will accelerate the run-off of non-core assets and businesses and sell down its 62% stake in Barclays Africa. A dividend of 6.5p per share is declared for 2015, but will be cut to 3.0p for the next two years. The UK business will be ring-fenced by 2019 and Barclays expects both the two ongoing divisions to earn double digit returns on equity once run-off is complete.

Adjusted profits were broadly flat, at £5.4bn compared to £5.5bn in 2014. A raft of additional provisions for PPI compensation and regulatory misdemeanours in a broad slew of activities where Barclays really should have behaved better than they did, contributed to statutory profits of just £2.1bn compared to £2.3bn in 2014.

Common Equity Tier one capital improved 110bp to 11.4%, driven by a reduction in assets as the group sold off the non-core. Tangible net assets fell 10p to 275p per share.

The shares responded to the new strategic approach under new CEO, Jes Staley, with a fall of around 5%.

Our view:

Bob Diamond wouldn't have done it this way. Previously, Barclays was busily trying to build a global investment bank, supported by the capital and cash flows thrown off by the dull old bits of Barclays of old. Even after Bob left, Barclays was still trying to sail a course between focusing on retail and commercial clients and keeping a major investment banking operation ticking over. Turns out though, that dull old stuff is pretty shiny after all, if you just give it a bit of a rub. And as for the global investment bank, well, best not to ask, for the only thing certain about investment banking is the cost base.

The new structure keeps things simple. Barclays UK contains the bits we all recognise as Barclays, a High Street bank, serving 22 million of retail customers and almost a million smaller businesses with current accounts, loans, cards and mortgages, plus wealth management. The bank will have around £70bn of risk weighted assets (RWAs) and £200bn of leverage, with a loan to deposit (LTD) ratio of circa 95%.

Barclays Corporate & International will have the larger balance sheet, RWAs of around £195bn, £575bn of leverage and a LTD ratio of circa 85%. It will contain the business banking operations serving larger enterprises, a City and Wall Street investment bank and international cards operations and payments.

Before we get to this nice, simple structure, there are still around £50bn of non-core assets to wind down or dispose of and this will depress earnings in the near term, for the non-core division is expected to generate negative income of around £200m per quarter and will have its own operating costs to bear too. Hence the lowered dividends.

It is taking a long, long time to sort Barclays out, but under Mr Staley it finally looks like the bank is taking it seriously. The loss of the African business will either prove to be a blessing, if South Africa goes down the tubes, or a huge missed oppportunity, if Africa does really make it in the next decade or two. Ironically, Bob Diamond is currently trying to build a pan-African commercial bank. Please, don't let it be him, as the National Lottery adverts say.

When it is all over, Barclays should have two high quality financial services divisions, each big players in their own, limited choice of activities, earning decent returns on equity, although as always with banking, they will be cyclical. Eventually, the dividend potential ought to be good, but investors will have to wait until 2018 at the earliest to find out how good. Lloyds, of course is further down the course of reshaping itself and already busily ramping up its own dividend payouts.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.