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Barclays - dividend suspended following BoE request

Nicholas Hyett, Equity Analyst | 1 April 2020 | A A A
Barclays - dividend suspended following BoE request

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Barclays plc Ordinary 25p

Sell: 168.28 | Buy: 168.32 | Change -0.18 (-0.11%)
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Barclays has suspended all returns to shareholders, including the final dividend payment of 2019, following a request from the Bank of England to all UK banks.

The board will decide on any future dividend policy and amounts at the end of 2020.

The shares fell 5.8% in early trading.

View the latest Barclays share price and how to deal

Our view

The news that Barclays, along with the other major UK banks, is suspending shareholder returns doesn't come as a surprise.

The government and Bank of England (BoE) have taken drastic action to free up banks' capital and encourage lending to smaller business. Paying out surplus capital to shareholders in that environment was never going to go down well, and the BoE has (to all intents and purposes) instructed banks to scrap any dividends until next year.

But preserving capital may be no bad thing. The months ahead look set to be tough for the sector.

We've already seen several companies file for bankruptcy, and as the lockdown drags on we expect to see more. That means a rise in loan defaults which will eat into the bank's profits and ultimately capital. Widespread uptake of mortgage holidays and debt relief would also reduce cash coming through the door.

Even financially sound businesses will be leaning heavily on their bankers in the months to come. As many businesses see sales fall to near zero, borrowing is the only way to meet expenses and that means drawing on existing loan facilities and looking for new ones. Banks' key capital ratios are calculated by dividing available capital by 'risk weighted assets' or 'RWAs'. As loans to customers increase, RWAs increase and capital ratios fall (even if available capital remains unchanged).

The move by the BoE to cut rates to just 0.1% in March (a record low) is also bad news for the sector. The lower interest rate will largely be passed onto borrowers thanks to a combination of base rate tracking loans, competition and regulatory action. But the interest banks pay to savers is already on the floor. With little room to push funding costs lower the net interest margin (the difference between what the bank can make on loans and pays for funding) will be squeezed. That will significantly reduce the profitability of loans.

All this means Barclays' sizeable investment banking business could prove key in the immediate future. It doesn't rely on interest income and volatility is generally good news for investment banks, as client trading and hedging activity increases - although that's also going to increase the division's RWAs with knock on effect for capital levels.

Elsewhere, the Barclaycard business creates potential for a rise in bad loans if unemployment spikes not only in the UK but internationally. Consumers tend to max out the credit card before they go bankrupt, so the losses can be sizeable. As things stand governments look set to take action to keep unemployment low, but it's still one to watch.

Barclays' relatively higher exposure to corporate clients could also make for a bit of a rocky ride. We've seen lots of companies draw down their entire revolving credit facilities, the corporate equivalent of maxing out the credit card. That will have seen a rapid increase in lending and it also creates scope for large 'one-off' credit events if clients go bankrupt.

Fortunately there's some good news hidden among the doom and gloom. Banks generally are significantly better capitalised today than they were before the financial crisis. While the next few months will be difficult that should allow the sector to hopefully weather the storm without the painful bailouts of last time around.

Generally we think Barclays is among the better placed names at the moment. The investment bank should help offset some of the headwinds elsewhere in the short term - and that diversification sets it apart from some of its more UK high street focused rivals.

However the length of lockdown and strength of the eventual recovery will determine the extent to which the bank has to wind down its capital reserves. Until those reserves are adequately replaced the dividend is likely to stay on hold.

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Full Year Results - 13/02/20

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.

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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