3 Reasons To Give Barclays PLC The Heave-Ho

Royston Wild looks at why Barclays PLC (LON: BARC) could prove a dangerous stock selection.

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In recent days I have looked at why I believe Barclays (LSE: BARC) (NYSE: BCS.US) is poised to create plentiful investor rewards (the original article can be viewed here).

But, of course, the world of investing is never black-and-white business — it take a confluence of views to make a market, and the actual stock price is the only indisputable factor therein. With this in mind I have laid out the key factors which could, in fact, put Barclays under significant pressure.

Courtroom chaos set to continue

Barclays remains weather-beaten by a variety of mis-selling scandals dating back many years. Firstly, the bank is facing a steady stream of claims related to the wrongful sale of payment protection insurance (PPI) and interest rate hedging products, and swallowed £220m of provisions during September-December owing to these regulatory and litigation issues.

The business is also facing fresh allegations over manipulating Libor, it emerged in recent days. In 2012 Barclays shelled out £290m in fines for fixing the benchmark interest rate in previous years, but last week three more traders were charged by the UK’s Serious Fraud Office for alleged mispractice between 2005 and 2007.

And just this week Barclays was hit with a fresh US lawsuit alleging manipulation of the London benchmark gold price. With the conveyor belt of new cases showing no signs of slowing, the final amount that Barclays will be forced to cough up remains anyone’s guess.

Investment bank in the mire

The effect of macroeconomic unease has weighed heavily on the Barclays’ Investment Bank over the past year, with revenues here dropping 9% during 2013 to £10.7bn. Combined with a 5% rise in operating expenses, this pushed pre-tax at the division profit to £2.5bn during 2013 from £4bn in the previous year.

The bank commented that “market uncertainty around central banks’ tapering of quantitative easing programmes impacted activity” last year. With patchy economic data continuing to stream out of the US, question marks over when — and by how much — the Federal Reserve will next choose to rein in its asset-purchase scheme. This could continue to impact the division looking ahead.

Costs reduction running behind schedule

Although Barclays’ Transform package is facilitating aggressive cost-cutting across the business — indeed, the programme will see 12,000 jobs go this year alone — some critics argue that the bank is not slashing expenses as quickly as it could.

Excluding the costs of Transform, operating expenses exceeded the bank’s £18.5bn target for 2013 due to the effect of legal redress. The company affirmed its cost target of £16.8bn for 2015, but Barclays will have to pull a lot of levers in order to achieve this, particularly in the event of substantial legal cost escalations.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Royston does not own shares in Barclays.

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