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Barclays - error could cost up to 450 million, buyback delayed

Barclays - error could cost up to 450 million, buyback delayed

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Barclays plc Ordinary 25p

Sell: 165.70 | Buy: 165.74 | Change -2.78 (-1.65%)
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Barclays expects to lose around £450m relating to the mishandling of US Securities. The group sold more structured and exchange-traded notes than it was allowed to in 2019. Barclays was registered to sell almost $21bn of securities, but exceeded this by over $15bn. The error means Barclays has announced a rescission offer. This is where the group must rebuy the oversold notes at the price they were sold.

Barclays has started an independent review and regulators are making inquiries and asking for information.

The group's CET1 ratio is now expected to be in the middle of the 13-14% target range. The £1bn share buyback announced at full year results in February has been delayed and will start in the second quarter.

The shares rose 1.8% on the day of the announcement.

View the latest Barclays share price and how to deal

Our View

The sound of regulators knocking on the door is never good for a bank. The mishandling of US securities is unhelpful for sentiment to say the least, and raises some governance questions. But while the full effect of this error is yet to play out, it's important to focus on the bigger picture. This blunder is unfortunate, but not a derailment of the investment case.

Barclay's new CEO has delivered a positive set of full year numbers. Profits have been super-charged thanks to a multi-billion-pound reversal in impairment charges, as the economic outlook is better than expected.

This is nothing other than a welcome development, but impairment releases are not a long-term source of profit growth. It's more important than usual to have a deeper understanding of the wider business.

As we'd hoped, consumers and businesses are starting to loosen the purse strings. When customers are nervous, card balances get paid down faster, resulting in reduced interest income. We're encouraged to see that balances are starting to rise once more.

The mortgage book is also going from strength to strength, with mortgage lending up almost £10bn in the UK. That's thanks to a combination of new applications and customer retention. Mortgages are a source of long-term income.

But Barclays isn't all about traditional banking and bog-standard loans. Barclays is the sixth largest global investment bank - a fact sometimes overlooked thanks to its position as a UK high street staple. This means it's far less reliant on traditional interest income, and instead generates most of its income from fees, commission and trading.

This different model is an area of potential growth over the long term. Public and private markets are growing, and some investment banking competitors have reduced their activity, meaning market share is there for the taking.

Relying more on fees and commission also means historically low interest rates don't have quite as much of a negative effect. That's not to say they have no meaning for Barclays - far from it - and the low interest rate environment is keeping a lid on how profitable a bank's loans can be. That is likely to be the case for some time.

Barclays is well capitalised, even over capitalised. It currently has a CET1 ratio - which is a key measure for capitalisation - some way higher than the regulatory minimum, although the recent US error has dented this. That's underpinning a generous share buyback programme as well as a progressive dividend (current prospective yield of 5.1%). Remember, no dividend is ever guaranteed.

Barclays offers something a little different to the rest of the sector. It's more diversified, and that has been well rewarded over the last couple of years. That reduces its exposure to interest rates but doesn't eliminate it, and we suspect its stubbornly low interest rates that are behind the bank's valuation. Given its varied revenue base, that doesn't seem too demanding.

Barclays key facts

  • Price/earnings ratio: 0.47
  • Ten year average Price/earnings ratio: 0.60
  • Prospective dividend yield (next 12 months): 5.1%

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.

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Full year results

Total income rose 1% to £21.9bn for the full year, as a 1% fall in net interest income to £8.1bn was offset by a 2% increase in other income. A huge reduction in credit impairment charges for bad loans helped pre-tax profit rise 74.5% to £8.4bn.

Barclays announced a full year dividend of 4.0p, taking the total payment to 6.0p per share. A £1.0bn buyback was announced, in addition to the £500m announced earlier in the year.

Net interest margins (which show the difference between what the bank charges borrowers and pays for funding) dipped slightly from 2.94% to 2.93%m. Loans and advances to customers rose to £361.5bn from £342.6bn the year before.

Non-interest income rose 2% to £13.9bn, including a 20% increase in the UK business where income is returning to pre-pandemic levels. Trading income was 18% lower at £5.7bn in the International business, income from fees and commission rose 17% to £6.7bn. International income was held back by Fixed Income, Currency and Commodity (FICC) income falling by a third, due to tougher market conditions and reduced customer activity.

Barclay's impairment charges swung from £4.8bn, to a £653m release. Underlying operating expenses were flat at £12.0bn. The cost to income ratio stands at 66%, and the group continues to work towards getting this below 60%.

The group's year-to-date CET1 ratio, which is an important measure of banking capitalisation, remained stable at 15.1%.

Barclays also highlighted three areas of long-term growth it plans to take advantage of, including: digitisation of financial services, growing its investment bank as private and public markets have increased and to "capture opportunities as we transition to a low-carbon economy".

Find out more about Barclays shares including how to invest

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.