That sinking feeling again

If there is any one group of investors out there who have grown used to that sinking feeling often precipitated by a sharply declining share price, then that group of investors would probably include a number of Barclays (LSE: BARC) shareholders. After all, the shares were down by 30% year to date, even before this week’s losses.

When markets awoke on Tuesday morning, almost all investors in UK banks will probably have been reintroduced to that familiar sinking feeling again, as the news wires were immediately clogged with details of what is potentially one of the largest tax scandals in history.

This was as a consortium of journalists had begun to report on the Mossack Fonseca data trove, a collection of stolen client records detailing the offshore investment and tax arrangements of some of the world’s most influential people.

While news reports weren’t short of world leader and celebrity names, almost immediately a number of global banks were implicated, prompting sharp losses for shares across the entire sector during the session.

Barclays wasn’t immune to this sudden wave of selling, although the bank hasn’t yet been named as one of those responsible for any of the offshore companies that are at the heart of the investigation. So far, the list of apparent offenders appears to be limited to the usual suspects, UBS, HSBC, Credit Suisse and Coutts & Co. Barclays isn’t anywhere to be seen and so, concerns over this point are probably unwarranted.

Talking down

Yesterday afternoon Barclays caught the market by surprise when it issued a mandatory trading update alongside its call for a shareholder vote on the disposal of BAGL, the African division.

Mostly comprised of reiterations from the full year there was little by way of real ‘news’ in the update, although the continued gloom means that it read a lot more like an extended profit warning than anything else.

A cynic would say that the tone of the new management forms part of an attempt to ‘talk down’ investor expectations of the bank and that the practice of ‘kitchen sinking’ is alive and well in the corporate world.

In addition to confirming a poorer performance from the investment bank so far in Q1, group wide financial performance is also likely to be further impacted by an ongoing deterioration of returns in Barclays Non Core division, led predominantly by losses in its Education, Social Housing & Loan portfolio (ESHLA).

Food for thought

Quite apart from giving the impression that, after having thrown the kitchen sink at investors when reporting full year results, new management is now seeking to throw the tea towels, aprons and cutlery too. The recent trading update also prompts several questions, all concerning the ESHLA portfolio:

Why did a revaluation of this portfolio cost the bank £935 million in 2015 and why, after such a significant revaluation, is it still racking up losses to the extent that it can impair overall group performance? How large is the portfolio and what is actually in it?

Barclays isn’t the first major bank to suffer losses on bond portfolios. I have previously written about how some banks are challenged by risks stemming from the corporate bond market, but this can also be interpreted as meaning risks stemming from almost anything that is non investment grade or ‘high yield’.

Barclays said at the full year that the cause of losses in the ESHLA portfolio is widening spreads. But in response to a personal enquiry made this morning, the investor relations team stated that the portfolio is comprised of only UK assets, which should mean that it is free from high yield instruments.

However, this isn’t the first time that widening spreads have proven a burden in recent times and the fact that the portfolio has remained problematic long after its revaluation is ominous, almost reminiscent of the Credit Suisse debacle. I’m now wondering whether the discount implied by Barclays 0.55 x price/tangible book value measure is now warranted.

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