After a decent share price performance in 2012, the subsequent two years have been tough for Barclays (LSE: BARC) (NYSE: BCS.US) shareholders.
At 228p, the shares are down 25% since their February 2013 peak. And after venturing into the new year on a mini bull run, the price has turned and slumped to a 16% loss in 2014 so far.
That’s with rises in earnings per share (EPS) of nearly 30% forecast for this year and next, and with a recovering dividend predicted to yield 4.1% by 2015. So what’s up?
Regulatory failings
The problem is of fears pf continuing fines for newly exposed bad practices from the past, and that’s a legacy that investors really don’t like. Barclays’ latest penalty came only this month, after it was stung by fines totaling £47m.
In the UK, the Financial Conduct Authority (FCA) levied a fine of £38m on the bank for exposing clients’ assets to too much risk — between 2007 and 2012, the FCA found that Barclays had failed to keep £16.5bn of client assets separate from its own investment bank assets. Barclays said that no clients actually lost anything, but the FCA pointed out that they “…risked incurring extra costs, lengthy delays or losing their assets if Barclays had become insolvent“.
After that came a $15m hit in the US for faulty compliance processes after its 2008 Lehman Brothers takeover.
Dark pools
Then we have the problem of Barclays’ so-called dark pool, its trading system that allows clients to make large trades without the wider market becoming aware and without shifting prices adversely. That raises transparency problems, which would lead to inefficient pricing in the wider markets.
Regulatory authorities in the UK are working on plans to disclose more information about dark pool trading, but for Barclays things are worse in the US where the New York Attorney General has filed charges that the bank has dishonestly hidden the activities of some high-frequency traders. Rather than seeking a settlement, Barclays is fighting the charge — in a statement in July, the company said “We do not believe this suit is justified, and we have a duty to our shareholders, clients and staff to defend our position“.
Opportunity vs fear
Given the US authorities’ propensity to levy huge great fines (especially against foreign companies, some would say), there are understandable fears.
So on the one hand, we have Barclays shares looking fundamentally undervalued on a P/E of just 8.4 based on 2015 forecasts and with a dividend yield of 4.1% expected. And and on the other, the unquantifiable risk of an unfavourable dark pool verdict (and any other skeletons that have yet to emerge from the closet).
