Barclays’ (LSE: BARC) recent set of results seemed to suggest that the bank is on the road to recovery. But not everyone’s convinced.
Indeed, one senior fund manager has gone so far as to brand Barclays “uninvestable”, citing litigation risks and the bank’s complexity as reasons to stay away.
And this view is shared by several other key figures in the City. In addition, the risk of yet more hefty fines is stopping investors from piling into Barclays’ shares, even though they trade at a discount to the wider banking sector.
Hefty charges
Barclays has paid out more than £9bn of conduct and litigation charges during the past four years, and there could be more fines to come.
At the end of last month, the bank revealed that it was adding another £200m to its £2bn provision to cover the expected cost of an investigation into Forex manipulation.
And there are a raft of other legal issues facing the bank. These include additional PPI costs, costs from the “dark pool” trading scandal, fines for helping to manipulate the price of precious metals, and the SFO probe into Qatar bribery charges.
However, if you strip out the risk of additional litigation, Barclays’ core business is coming back to life.
During the first quarter of this year Barclays’ core revenue rose by 2%, costs declined by 2%, and pre-tax profit jumped by 14%. What’s more, Barclays’ return on equity — a key measure of bank profitability — rose to 12%, hitting the bank’s long-term target. In fact, an ROE of 12% is better than Barclays’ international peer HSBC, which reported a ROE of 11% during the first quarter.
Further, the bank’s legacy issues are starting to taper off. Provisions for bad debts fell by 7% during the first quarter. In the same period the bank’s non-core unit, set up to house toxic businesses, reported a £10bn drop in risk-weighted assets to £65bn.
A risk worth taking?
So overall, Barclays’ underlying business is heading in the right direction. But, for the time being, litigation risks will continue to weigh on the bank.
Nevertheless, for those willing to take the risk, Barclays could be one of the best investments in the FTSE 100.
You see, while the volume of litigation risks facing Barclays is concerning, sooner or later these legal costs will come to an end. At this point, the market should re-rate the bank’s shares, rewarding those investors that got in first.
Moreover, Barclays’ valuation is extremely attractive right now. The bank is currently trading at a 15% discount to book value and a forward P/E of 11. Underlying earnings per share are set to rise by 36% this year and a further 21% next year. On this basis, Barclays is trading at a 2016 P/E of 8.8 and a PEG ratio of 0.4. The bank is set to offer a dividend yield of 4.2% next year.
