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Barclays PLC: The Bank To Watch In 2014

Electric shock

After a blistering couple of years, it was time for Barclays (LSE: BARC) (NYSE: BCS.US) to take a breather, and the share price duly ended 2013 where it began. As an investor who missed out on the 2011 and 2012 surge, that pleases me. I hate buying volatile stocks (and the banks are volatile these days) on the back of a good run. Now, I reckon Barclays could be the bank to watch in 2014.

You always have to keep a close eye on Barclays, especially if you’re a regulator. The US Federal Energy Regulatory Commission is currently trying to collect $488 million in fines, after Barclays was found to have manipulated the American electricity market. Its lawyers are still trying to wriggle out of that one, but the string of fixing, rigging and mis-selling scandals seems to have no end, so brace yourself for more shocks in 2014.

Transformer

You should also brace yourself for more profits volatility. Note that shocking 20% drop in Q3 profits. That was largely due to the £741 million costs of Project Transform, so let’s hope the short-term hit is worth it, by ultimately changing the culture of the bank for the better (and finally stemming the flow of scandals). 

I am concerned about the performance of its global investment bank, where profits recently halved to £463 million after revenues from fixed income, currency and commodities plunged. This is part of an industry-wide trend, penance for the financial crisis. There are macro threats, too, including Q3 tapering, the next phase of the eurozone crisis and the shaky Chinese shadow banking system. The last two would slaughter banking stocks if they explode into deadly life, as some analysts predict. Barclays would get burned like everybody else.

Yet Barclays has underlying strength. It is steadily boosting its core tier 1 ratio, which now stands at 11.3%, up from 11.1% at the end of June. Its diversified business mix and global exposure helped it post £4.97 billion profit in Q3, despite that 20% dip. It has just won its highest ever share of the European equity capital market. It is slowly beefing up its dividend, and now yields 2.3%. Better still, it is on a forecast yield of 4% for December 2014. Buy now and you are locking into a rising income stream.

How to buy the banks

We all know Barclays has problems and the road to recovery is a long one. Trading at 8.3 times earnings, that is acknowledged in the price. You have to pay 14.6 times earnings to buy so-called good bank HSBC. Better still, while Barclays suffered a whopping 27% drop in earnings per share growth in 2013, this is forecast to blossom into 27% growth for the next 12 months. And that is something else to watch out for in 2014.

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> Harvey doesn’t hold shares in any company mentioned in this article.