Barclays plc (BARC) Ordinary 25p
HL comment (20 February 2024)
Barclays reported fourth-quarter income of £5.6bn, down 3%. Performance was mixed across divisions, with growth from higher rates in the UK and rising US card balances more than offset by lower investment banking activity, consumers shopping for better deposit rates and ongoing mortgage headwinds.
Profit before tax of £0.1bn and return on tangible equity (RoTE) of 5.1% were impacted by the £0.9bn restructuring charge. Barclays expects these charges to help deliver cost savings of £0.5bn in 2024, with a payback period of less than 2 years.
Capital levels remain at the top end of the target range, with a CET1 ratio of 13.8%. The group announced a full-year dividend of 5.3p and a £1bn buyback.
New medium-term guidance looks for RoTE of over 10% in 2024, improving to 12% in 2026 (2023: 10.6%). The group plans to return £10bn to shareholders between 2024-26, largely through buybacks.
The shares rose 5.2% i n early trading.
Fourth quarter performance was a little worse than expected, largely because of higher costs associated with the restructure. But new medium-term guidance following a strategy update was frothy enough to whet investors' appetites. Barclays will now report through five distinct operating divisions with accountability as a key focus.
Higher interest rates were still the main driver of profit growth last year, but the benefits look to have peaked. 2024 will be more about trying to stabilise performance, than beat the year just gone. On that front, there are positive developments. Consumers have been shifting to higher rate, longer term, savings accounts over the past few quarters - bad for banking profit. But that shift is now slowing, and we think the bulk of the account swapping is behind us.
The mortgage market's also been a headwind for most banks, but trends are starting to improve. Add in the ongoing benefit from the structural hedge (essentially a bond portfolio that should yield higher returns as older contracts mature), and there are reasons to be optimistic about UK interest income into 2024 and beyond.
But Barclays is a well-diversified beast, and the UK's just one part. It's also one of the largest global investment banks and has a sizeable US credit card business.
Higher rates along with increased US credit card balances, have been a tailwind, but it can be a double-edged sword. Default rates on US credit cards are now up to pre-pandemic levels. These levels aren't an issue as such, but the trend is something to watch. Any delay to expected US rate cuts would keep the pressure on its card users and could see defaults creep higher in the coming quarters.
The balance sheet is well capitalised and new guidance points to £10bn in distributions over 2024-26, weighted toward buybacks. That's around 45% of Barclay's current market cap. It's ambitious and no returns are guaranteed.
Barclays continues to trade at a discount to European peers, largely a result of poor image from a slew of governance mishaps and a lack of faith that recent returns are sustainable. It's a valid perspective, but one that's now perhaps been a little overdone. There's rerating potential but it's unlikely to materialise until the market gets some tangible evidence that the new strategy is working.
Environmental, social and governance (ESG) risk
The financials sector is medium-risk in terms of ESG. Product governance is the largest risk for most companies, especially those in the US and Europe with enhanced regulatory scrutiny. Data privacy and security is also an increasingly important risk for banks and diversified financial firms. Business ethics, ESG integration and labour relations are also worth monitoring.
According to Sustainalytics, Barclays' overall management of material ESG issues is strong.
Barclays has some room for improvement regarding customer data privacy and environmental commitments. Despite strong policies overall, investigations are ongoing about alleged currency manipulation, and its data security could use strengthening with more frequent risk assessments and external audits. The quality of its environmental policy has deteriorated, with limited commitments to reducing emissions.
Barclays key facts
- Forward price/book ratio (next 12 months): 0.35
- Ten year average forward price/book ratio: 0.52
- Prospective dividend yield (next 12 months): 6.6%
- Ten year average Prospective dividend yield: 4.2%
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. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.
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