Profits up as new Barclays PLC (LON:BARC) CEO charts a new course.
Barclays (LSE: BARC) (NYSE: BCS.US) reported adjusted profit before tax of £7bn in 2012, up 26% from the year before. Of course, this adjustment ignores the additional £1.6bn the bank had to set aside to pay people inappropriately sold payment protection insurance (PPI) during the year, as well as £850m to pay back people sold dodgy interest rate hedging products.
But all that is in the past. Barclays has a new chairman in Sir David Walker; a new CEO in Antony Jenkins; and is also looking for a new finance director and general council. Investors can now look to the future of Barclays that Mr Jenkins laid out in a series of commitments to shareholders for 2015.
These include pulling back from risky lending and investment banking activities -- 1,800 members of the Corporate & Investment Bank will be shuffled out the door, along with 1,900 folks working in the bank's European retail operations. Future investment will focus on building the bank's presence in the US and Africa and shoring up the UK operations.
A leopard and his spots
Jenkins is showing his retail banking background -- as well as a feel for investor sentiment -- by turning the bank away from the areas of operation that caused the worst headlines in the past year, which his comments clearly place at the feet of his investment banking predecessors.
"There is no doubt that 2012 was a difficult year for Barclays and the entire banking sector. The behaviours which made headlines during the year stemmed from a period of 20 years in banking in which the sector became too aggressive, too focused on the short-term, and too disconnected from the needs of customers and clients, and wider society. Barclays was not immune from the impact of these trends, and we suffered reputational damage in 2012 as a consequence. Change is needed both in our industry and at Barclays."
Part of this change is a review of 75 business units (who knew there were so many ways to lend people money?) to determine which can provide a decent return without further threatening the company's reputation. That is assuming Barclays still has a reputation worth protecting, of course.
Separating the dividends from the chaff
Once all that is sorted, Jenkins is targeting a return on equity above 11.5% -- the bank's estimated cost of capital -- by 2015. Shareholders should be pleased by that target -- an investment that can't provide returns above its cost of capital is not creating value -- which is a nice improvement on this year's 7.8% (itself a solid improvement on last year's 6.6%) but a sight less optimistic than the bank's previous target of 13% by 2013.
When Jenkins and his new Barclays culture have had a chance to shake out all the troublemakers and re-establish the company as the 'go-to' bank for savers, investors and businesses, he plans to focus on improving the dividend, looking to pay shareholders 30% of earnings eventually.
This year's 6.5p dividend was up 8% from a year ago, though still less than 20% of the 34.5p in adjusted earnings per share, but for now Barclays needs to retain every penny it can in order to build up its capital reserves in anticipation of stricter regulations in the coming years.
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> Nate does not own any shares discussed above.
