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Barclays - solid end to 2019, but challenging year ahead

Nicholas Hyett | 13 February 2020 | A A A
Barclays - solid end to 2019, but challenging year ahead

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Barclays plc Ordinary 25p

Sell: 180.06 | Buy: 180.12 | Change 3.36 (1.90%)
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Total income rose 2% to £21.6bn in 2019, slightly ahead of expectations, driven by a strong result from the investment banking and US credit cards businesses. Profit before tax rose 25% to £4.4bn, as the group benefited from a significant decline in conduct and litigation charges.

The group announced dividends for announced final dividend of 6p, taking the full year payment 9p per share, up 38.5% year-on-year.

The bank highlighted macroeconomic uncertainty, and the low interest rate environment as challenges going into 2020.

The shares fell 3% in early trading.

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Our view

Barclays is made up of two distinct businesses, Barclays UK and Barclays International, and it's banked some substantial progress in both in 2019.

A resilient UK bank is cutting costs and keeping bad loans to a minimum, generating a reliable income stream. The division contains the bits we all recognise as Barclays: a high street bank serving 23m retail customers and almost a million smaller businesses with current accounts, loans, cards and mortgages, plus wealth management.

Barclays International includes the business banking operations serving larger enterprises, a City and Wall Street investment bank, international card operations and payments. The combination of good US credit card growth, lower capital intensity, fee income and increasing corporate loans on the International side is putting the icing on the high street banking cake.

It's not all smooth sailing though. Barclay's has so far stuck by existing targets on profitability, but warned they're becoming increasingly ambitious given the economic backdrop and low interest rate environment.

There's only so low you can push interest rates on savings accounts before customers go elsewhere, but aggressive competition in the key mortgage market means the bank has to pass rate cuts on to borrowers. The net effect is that the bank earns a lower return on the cash it lends. With more mature loans rolling off on to lower rates, and net interest margins deflating as a result, that pressure will only build as time goes on.

The good news is that cost control looks to be improving substantially. Management have made it clear they're willing to flex costs to achieve profitability targets if necessary and falling conduct costs are a significant tailwind - although a new investigation into CEO Jes Staley is unwelcome. We also view Barclays' international cards business as a key asset in the longer term - helping to diversify the bank from UK only exposure.

Overall, Barclays is increasingly attractive in our opinion. Bank's often act as a barometer for the economies they operate in, and we think fears about Brexit's impact on the UK economy is behind Barclays' comparatively high 5.4% yield and lower price to book ratio of 0.49. However, the combination of international opportunities and a healthy domestic income stream could work nicely if the UK emerges from Brexit unscathed.

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Full Year Results

Barclays UK saw net interest income fall 2% to £5.9bn as lower net interest margins (now 3.09% - representing the difference between what the bank earns on loans and pats on deposits) offset increased loans to customers (up 3.3% to £193.7bn). However, fee income rose 8% to £1.5bn.

Bad loans fell 14% year-on-year to £712m, reflecting a £100m allowance made last year to reflect economic uncertainty in the UK. The bank has also taken action to reduce its exposure to higher risk unsecured loans.

Operating costs in Barclays UK fell 2% year-on-year to £4.0bn, reflecting a smaller number of branches, now at 963. As a result the bank's cost to income ratio (excluding litigation) fell one percentage point to 55%.

Barclays International saw total income rise 5% to £14.7bn. That reflects a strong result from the fixed income markets division of the investment bank and growth in US cards. Operating costs in the division rose 2% to £9.2bn, reflecting increased investment in the cards business.

At a plc level litigation and conduct costs fell 16% year-on-year to £1.8bn. That was despite an additional £1.4bn provision for PPI compensation (compared to £400m in 2018).

The bank finished the year with a CET1 ratio of 13.8% (2018: 13.2%) which is ahead of the bank's 13.5% target. However, while return on tangible equity improved to 9% in 2019 and further improvements are expected this year the bank suggested achieving its 10% target next year would be challenging.

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