Barclays sees turnaround gathering pace

Lender to return its dividend to previous levels, while mulling stock buybacks for the 1st time in more than 20 years

By BLOOMBERG

LONDON • While Barclays plc’s messy 2017 ended on a mixed note, CEO Jes Staley sees better things to come.

Income from trading fell 18%, according to the bank’s fourth-quarter (4Q) earnings report yesterday. That beat both the 26% decline estimated by UBS Group AG and the average 25% drop in markets revenue posted by Wall Street firms. The London- based lender also said it will return its dividend to previous levels, while considering stock buybacks for the first time in more than 20 years, as its capital buffer rose in excess of its target.

“We are pleased with the start to the year, and in particular in the markets businesses”, where “income is tracking above the level for the corresponding period in 2017”, in both dollar and pound terms, Staley said in the earnings statement.

The shares surged. After three previous quarters of disappointing results, the 4Q figures and 2018 trends are a welcome relief for the CEO, who has staked his reputation on turning around the securities unit. Even after years of restructuring, it’s still the firm’s worst-performing division and has been losing market share to rivals.

The common equity Tier ratio, a measure of financial strength, jumped to 13.3%, beating the 12.9% average estimate.

“Guidance on dividends and buybacks will be welcomed, although investors will continue to be sceptical regarding the capability of the investment bank to deliver,” said John Cronin, an analyst at Goodbody. He expects management to be bullish about the “ability for investment bank to achieve acceptable returns, now that volatility is re-emerging in markets”.

New Probe
Barclays is still paying penalties for its past sins, taking another £240 million (RM1.3 billion) charge for litigation related to foreign-exchange manipulation.

Staley has also embroiled himself in a scandal over whistle-blowing last year, and the bank has been charged with fraud by UK regulators. The firm also revealed the UK Financial Conduct Authority started a new enforcement investigation this month into how the firm treated customers in default or arrears.

Pretax profit, excluding litigation costs, rose slightly to £334 million in the 4Q, missing the average £570 million average estimate of 14 analysts compiled by the bank. Net operating income was about £4.45 billion, almost unchanged from a year earlier.

However, on a full-year basis, Barclays swung to a loss of £1.9 billion from a profit of £1.6 billion in 2016 after taking big hits from litigation, the revaluation of deferred tax assets in the US and other charges, such as the costs of selling down a stake in its African business.

“The market is likely to be pleased by expectations of dividends and talk of buybacks, however, with poor underlying profitability” and “material litigation charges still to come, we would not hold our breath”, Keefe, Bruyette & Woods analyst Edward Firth said.

“Overall, these were a very poor set of results, missing weak expectations.”

Investors looked through the pain of 2017 and focused on the outlook.

The dividend boost, which will restore the payout that Staley cut in half in March 2016, is a sign executives are confident the bank’s slimmeddown balance sheet has enough capital to survive another crisis and pay its remaining misconduct fines. Staley had slashed the payout to absorb losses from an accelerated run-down of a unit that housed toxic or unwanted assets.

‘Obligation’ to Shareholders
“Hopefully our shareholders will take comfort from the fact that we are going to increase our dividend as planned in 2018, a significant amount,” Staley said in an interview on Bloomberg Television.

Additionally, the bank “is going to start to look at buybacks down the road”, because “we recognise that we have an obligation to begin to return excess returns in greater numbers to our shareholders”.

Finance director Tushar Morzaria said Barclays took a £127 million charge related to Carillion plc, the UK construction company that collapsed earlier this year. That helped push the corporate and investment bank to a pretax loss of £252 million overall.

Costs climbed 4% to £2.4 billion, partly due to spending on technology.

Fees from advising clients on mergers and acquisitions and underwriting slid 5%, compared to the 7% drop predicted by the analysts at Keefe, Bruyette & Woods.

Barclays stock rose 4.4% to 211.05 pence or £2.11 at 9:40am yesterday in London, touching a nine-month high.

Before the results, it had dropped 13% since Staley took over in December 2015, compared to an 18% gain by the UK’s FTSE 100 bank index.

“The key highlight in our view is capital”, which “lays the path to rising dividends and buybacks”, said Raul Sinha, an analyst at JPMorgan Chase & Co In London.

Bonus Pool
The bonus pool across the firm fell 2% to £1.5 billion for the year. For the front office of the corporate and investment bank, the pool fell 1.2% to £864 million, a far slower pace than the 22% drop in annual profit at the securities unit.

Compensating the best-performing traders and dealmakers while culling others is part of Staley’s plan to build a bulge-bracket investment bank capable of competing with the biggest players on Wall Street. In a gamble to boost returns, Staley has authorised a plan to reallocate capital from plain-vanilla lending to higher-risk trading and exotic products, activities the firm has shunned since the financial crisis.

Barclays didn’t provide updates on the three major legal cases it faces on both sides of the Atlantic. The bank is back in discussions with the US Justice Department over a multibillion-dollar penalty for selling toxic mortgage- backed securities before the financial crisis, after initially failing to settle and being sued in December 2016.

In the UK, authorities charged the bank with conspiracy to commit fraud related to its 2008 capital raising from Qatar, and last week added a charge of “unlawful financial assistance” at the holding-company level, a move that could have implications for Barclays’s ability to operate around the world if found guilty.

Here are some other highlights from Barclays’ results:
• Cost-income ratio was 87% in the quarter, the same as last year.
• Return on tangible equity at the corporate and investment bank was negative 20.2%, compared to -1.2% a year earlier. The same profitability measure was 10.7% at the British retail and cards unit.
• US corporate tax cuts resulted in a US$1.3 billion (RM5.09 billion) writedown for 2017, which Barclays had previously disclosed.

The bank is still some way off from hitting its targets for costs and profitability. In October it pledged to generate a return on tangible equity of greater than 9% in 2019 and more than 10% the following year, while targeting costs to be between £13.6 billion and £13.9 billion in 2019.