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Barclays - modest dividend returns

Nicholas Hyett, Equity Analyst | 18 February 2021 | A A A
Barclays - modest dividend returns

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Barclays plc Ordinary 25p

Sell: 187.20 | Buy: 187.26 | Change 0.60 (0.32%)
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Barclays reported a 1% increase in total income for the year, reaching £21.8bn. That reflects a very strong performance from the trading desks in the investment bank, which benefited from increased volatility in financial markets, more than offsetting weakness in high street and commercial lending.

Profit before tax fell 30% to £3.1bn, as provisions for bad loans more than doubled.

The bank announced a final dividend of 1.0p per share, with a further £700m to be returned to shareholders through a share buyback. The bank intends to pay a progressive divided going forwards, supplemented by share buybacks where appropriate.

The shares were broadly flat in early trading.

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Our View

The return of the dividend is the most notable feature of these full year results. However, it's modest compared to what we, and the market, had expected. Instead the vast majority of returns are being made through a share buyback - equivalent to 4p per share.

The choice of a buyback probably indicates belief on management's part that the bank's shares are undervalued to some degree. However, it also gives the group extra flexibility on returns going forwards. Investors tend to respond badly to dividend cuts, especially now Barclays has committed to a progressive dividend going forwards. By comparison it's far easier to flex buyback programmes to suit the economic conditions - and the outlook is still far from certain.

2020 results benefited from ideal conditions for the bank's trading desks, as customers' trading volumes and hedging activity increases. Meanwhile the glut of companies turning to financial markets for extra cash, whether that's through debt or issuing new shares, meant a hefty pay day for Barclays' investment bank.

That's been a crucial tailwind at a time when the core retail and commercial banking business has struggled.

Small businesses have leant heavily on the bank to provide the liquidity needed to see them through the crisis. Government schemes have seen Barclays lend an extra £11bn to SMEs, and while the government has underwritten potential losses on those loans, it's a sign of the stresses many businesses are under. Provisions for bad debt increased dramatically earlier in the year - and we'll only know for sure if they are sufficient when government support is withdrawn at the end of the crisis.

Meanwhile on the high street consumer lending has shifted towards less profitable categories. While Mortgage lending increased by £5bn, or 3.4%, that was offset by a £13.7bn, or 22.7%, fall in credit card or unsecured lending as consumers paid down debts. The shift towards lower risk property-backed loans is less profitable for Barclays.

Meanwhile profitability across both high street and business customers, has been impacted by the lower interest rates in the UK. The Bank of England cut rates to just 0.1% in March 2020 (a record low). Lower interest rates get passed on to borrowers through 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 is squeezed. That significantly reduces the profitability of lending.

What we're seeing here is a classic example of a bank as an economic bellwether. When economies struggle, interest rates and demand for loans falls, even as bad loans mount. If conditions turn and the UK economy accelerates out of the crisis then those headwinds should reverse, potentially fuelling a rapid recovery.

As things stand though, Barclays has a couple of things in its favour. The first is the extra diversity from the investment bank, and we see this natural hedge as one of the main advantages of Barclays' 'Universal Bank' model. Second is a robust looking balance sheet, with regulatory capital well above the minimum requirement. Provisions for bad loans also outstrip the amount of loans actually in default - covering a reasonable chunk of the loan book - and mean the bank can weather some extra defaults without taking a hit to its capital levels.

Overall we see Barclays as offering something a little different to the rest of the sector. It's more diversified, and that has been well rewarded. However, there are challenging times ahead and a price to book ratio that's some way below its long-term average reflects genuine worries about profitability in a low interest rate world. As things stand we see no evidence that interest rate trends are set to reverse.

Barclays key facts

  • Price/Book ratio: 0.42
  • 10 year average Price/Book ratio: 0.54
  • Prospective dividend yield (next 12 months): 3.9%

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Full Year Results

Net interest income fell 14% to £8.1bn during the year, despite a modest increase in the amount on loan. That reflects continued pressure on the bank's net interest margins (NIM), down to 2.94% from 3.42%, thanks to lower UK interest rates and a shift from unsecured lending to mortgages.

Non-interest income rose 12% to £13.6bn, driven entirely by improved trading revenues from the investment bank. The group benefited from an increased market size, amid pandemic related volatility, and an increased market share.

The bank reported impairments related to bad loans of £4.8bn during the year, with £0.5bn in the fourth quarter. £2.3bn of that relates to loans that are not currently in default, with the bank now making provisions for 12.3% of its unsecured lending book (2019: 8.1%).

Operating expenses rose 1% in the year to £13.7bn, driven by coronavirus related costs and restructuring charges. However, income growth meant the bank's underlying cost:income ratio remained unchanged at 63%. Excluding COVID and restructuring charges the banks actually saw costs improve year-on-year.

The bank increased its CET1 (Common Equity Tier 1) capital by £5.5bn during the year. That more than offset higher Risk Weighted Assets (RWAs) from increased lending, and together with the cancellation of dividends in 2020 and regulatory action meant the bank's CET1 ratio (a key measure of banking capitalisation) improved from 13.8% a year ago to 15.1%.

The bank reported a return on tangible equity of 3.2% (2019:5.3%).

The bank expects to deliver an improved return on equity in 2021, despite an uncertain outlook for UK and international lending. Impairment charges are expected to be materially lower next year, and the group will continue to reduce costs.

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All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.