It’s time to buy Barclays: the shares look cheap and prof­its are on the road to re­cov­ery

There is value in the bank’s shares as the cap­i­tal po­si­tion and div­i­dend are re­built, says James Ash­ton

The Sunday Telegraph - Money & Business - - Business -

IT HAS been a rare week for bank­ing head­lines be­cause Barclays made so few of them. For one of UK plc’s most en­gag­ing cor­po­rate sagas, that is quite a re­sult. In­stead, Royal Bank of Scot­land’s set­tle­ment with US reg­u­la­tors and de­vel­op­ments among the “chal­lenger” banks took cen­tre stage. The pro­posed union of CYBG, the owner of Cly­des­dale, and Vir­gin

Money is a re­minder of how hard it is to forge a cred­i­ble com­peti­tor to the big five. For all the talk of nim­ble fin­tech plat­forms and cus­tomer dis­sat­is­fac­tion, the quin­tet still stand firm with bal­ance sheets re­built after the bank­ing cri­sis and re­silient mar­ket shares. The City is warm­ing to the Barclays story but it has had to see past the drama first. The chief ex­ec­u­tive, Jes Sta­ley, was care­less in his pur­suit of a whistle­blower but has held on to his job after a year-long in­ves­ti­ga­tion. That gives the lender some much-needed sta­bil­ity to en­gage with Ed­ward Bram­son, the ac­tivist US in­vestor who has bought more than 5pc of the shares and is ex­pected to ag­i­tate for yet an­other shake-up.

On the plus side, Barclays has paid £1.4bn to set­tle with US au­thor­i­ties over the sale of toxic mort­gage-backed se­cu­ri­ties. How­ever, the Se­ri­ous Fraud Of­fice’s pur­suit of pay­ments made to Qatari in­vestors dur­ing a fundrais­ing a decade ago could prove costly, and the tap for PPI re­dress keeps run­ning.

Be­yond the chat­ter and con­tin­u­ing con­duct costs, what ap­peals now is Barclays’ in­vest­ment bank­ing fran­chise. The pur­chase of Lehman Broth­ers a decade ago still gives the bank a strong foothold with in­ter­na­tional cor­po­rate clients along the Square Mile-wall Street transat­lantic axis. It is some­thing that might have been pared back un­der Sta­ley’s pre­de­ces­sor, the re­tail-fo­cused Antony Jenk­ins, but the JP Mor­gan man has made it cen­tral to his strat­egy.

This point of dif­fer­ence from many of its com­peti­tors is am­pli­fied while the US econ­omy runs hot.

It is even more stark now that Deutsche Bank, the only other Euro­pean univer­sal bank, has given notice on its global am­bi­tion to fo­cus on sup­port­ing cus­tomers in Europe.

So if Barclays has bet­ter times ahead, has Bram­son – whose pre­vi­ous tar­gets have been the more mod­est Elec­tra Pri­vate Eq­uity and F&C As­set Man­age­ment – left it too late to make his move? Hardly. The bank’s po­ten­tial is yet to be re­flected in the share price. It is a point about which Barclays’ chair­man, John Mc­far­lane, does not need re­mind­ing. He vowed to dou­ble the share price from 260p three years ago – to a height that in­vestors have not seen for more than a decade – but so far it has gone back­wards not for­wards.

En­cour­ag­ingly, the div­i­dend will more than dou­ble to 6.5p a share this year, re­turn­ing it to 2015 lev­els. There is an ex­pec­ta­tion of more to come given that Barclays has sub­stan­tially fin­ished its lat­est re­struc­tur­ing. The ringfence around its day-to-day con­sumer and small busi­ness bank­ing ac­tiv­i­ties within a new le­gal en­tity has been erected a year early. Now it can get on with the busi­ness of cap­i­tal­is­ing on its strong per­sonal bank­ing and credit card fran­chises, which are fore­cast to have steady top-line growth ahead.

In the last quar­ter, trad­ing was a mixed bag. Prof­its were ahead of ex­pec­ta­tions thanks to the in­vest­ment bank­ing arm but the “core tier 1” ra­tio, the group’s main mea­sure of fi­nan­cial strength, was down at 12.7pc be­cause of con­duct costs. Sta­ley was con­fi­dent that it could be re­built with­out much trou­ble. Sim­i­larly, tan­gi­ble net as­set value fell by 25p to 251p to re­flect the statu­tory loss from the US fine plus hedg­ing move­ments, but an­a­lysts at Shore Cap­i­tal ex­pect it to re­cover.

With a group cost to in­come ra­tio of 63pc, there is scope to squeeze fur­ther, which is sure to be one of Bram­son’s fo­cuses. From £14.2bn last year, Barclays is guid­ing to group op­er­at­ing ex­penses of less than £13.9bn in 2019, which does not ap­pear overly am­bi­tious.

An­a­lysts at Jef­feries see £900m in pre-tax ef­fi­ciency ben­e­fits at the in­vest­ment bank from a com­bi­na­tion of cost re­duc­tion and rev­enue gen­er­a­tion. Bar­ring any un­fore­seen drama, earn­ings and cash re­turns look rosy by 2020. Trad­ing at eight times next year’s fore­cast earn­ings, there is value to be had here as the cap­i­tal po­si­tion and div­i­dend are re­built.

Questor says: buy

Ticker: BARC

Share price at close: Read Questor’s rules of in­vest­ment be­fore you fol­low our tips: tele­ questor­rules; twit­

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