How Safe Is Your Money In Barclays PLC?

Is Barclays PLC (LON:BARC) poised for a recovery or are there further pitfalls ahead. Roland Head takes a closer look.

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Barclays (LSE: BARC) (NYSE: BCS.US) is currently trading at 52-week lows, and is firmly out of favour with most investors. However, as I wrote recently, I think that Barclays looks cheap at the moment.

Indeed, I recently put my money where my mouth is, and purchased some Barclays shares. My view is that the bank’s rights issue provided a much needed boost last year, and that Barclays is now poised to recover — but as these key financial ratios show, some risks remain.

1. Net interest margin

Net interest margin is a core measure of banking profitability, and captures the difference between the interest a bank pays on its deposits, and the interest it earns on its loans.

barclaysBarclays reported a net interest margin of 1.76% for 2013, down slightly from 1.84% in 2012, and substantially lower thanall of its UK-listed peers, which have reported net interest margins of 2% or more for 2013.

Barclays UK retail banking operation, which accounts for around 40% of total lending and deposits, only generated a net interest margin of 1.3% last year. In comparison, Lloyds Banking Group reported a margin of 2.2% for its UK retail banking operations.  Clearly there is room — and need — for improvement.

2. Tier 1 capital ratio

Tier 1 capital is essentially a measure of a bank’s retained profits and its equity (book value). One of the requirements of the new Basel III banking rules, which come into force in 2015, is that banks will have to meet new, tougher, tier 1 capital standards.

Barclays’ reported a common equity tier 1 ratio under the expected new rules of 9.3% for 2013. While this is above the 7% minimum, it is the lowest of all the major UK banks, except Royal Bank of Scotland Group — not an attractive comparison for Barclays’ management.

3. Return on equity

Return on equity (RoE) is a useful way to measure the performance of financial firms, as it shows how much profit was generated compared to the book value (equity) of the firm.

Barclays reported an adjusted return on equity of 4.5% for 2013, half of the 9.0% it reported for 2012. The decrease was largely due to the effects of the bank’s £5.8bn equity raise, and to a £440m write down of Spanish tax assets, but it’s disappointing nonetheless.

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.

> Roland owns shares in Barclays but not in any of the other companies mentioned in this article.

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