Is It Time To Admit Defeat On Barclays Plc & Royal Bank Of Scotland Group Plc?

The worst may not be over for shareholders of Barclays Plc (LON: BARC) & Royal Bank of Scotland Group Plc (LON: RBS).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Eight years on from the Financial Crisis shares of Barclays (LSE: BARC) still trade at a fraction of their pre-crisis peak. Many in the City certainly appear convinced that the banking behemoth’s best days are behind it, so is it time for investors to throw in the towel?

The banking industry has always been cyclical, but at least shareholders could traditionally comfort themselves with high dividends. However, shareholders of Barclays will find no respite in dividend income as new CEO Jes Staley promptly cut these payouts by 50% in his first quarter at the helm.

Without great dividends to look forward to, can shareholders at least expect share prices to grow at a steady clip over the next few years? I remain doubtful. Although selling off African operations will net several billion pounds, if suitable buyers can be lined up, Barclays will still encounter the same headwinds it has faced since the Financial Crisis.

Capital requirements continue to increase, regulatory fines topped £4bn in 2015 alone, and the company’s massive investment bank continues to underperform. The investment bank’s return on average equity (RoE) for 2015 was a miserly 5.6%, compared to 8.7% for the African operations that management is selling off, a full 17.7% for the Barclaycard division and 12.1% for UK retail banking.

As we see, while Barclay’s domestic-oriented credit card and retail banking operations have profited from a strengthening UK economy, these earnings haven’t flown back to shareholders. And, if shareholders aren’t benefitting during the good times, I see little reason to invest for the long term in a bank that has failed to cut poorly-performing divisions, has high costs and offers little possibility of top-line growth.

More pain to come

Shareholders of Royal Bank of Scotland (LSE: RBS) can’t be much happier than Barclay’s investors. The struggling Scottish bank recently posted its eighth consecutive net annual loss, which sent share prices down to a mere £2.23 a share.

The most recent annual loss can largely be chalked up to a further £3.5bn in fines related to PPI claims and US mortgage-backed securities, among others. Unfortunately, looking past these payouts and the remnants of the struggling, soon-to-be-axed investment bank, RBS’s underlying go-forward business isn’t that strong either. UK retail banking operations’ RoE was 11.4% in 2015, down from 13.7% in 2014 and well below the level of competitors such as Barclays or Lloyds.

The biggest problem for RBS has been its continued struggles with high operating costs. The bank’s cost-to-income ratio, which measures how much it costs to bring in each pound of revenue, was 80% for the retail bank, and a full 127% for the group as a whole. Achieving the bank’s long-term target of a 50% cost-to-income ratio will require many more years of cost-cutting and downsizing. Given the fact that the bank is in worse shape than competitors and still faces a long, uphill slog to merely return to profitability, I foresee nothing but continued stagnation for RBS share prices.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

British pound data
Investing Articles

Starting with nothing? Here’s why now is the perfect time to start building a passive income

Many are worried that 2026 might be a bad time to start investing in stocks and shares. Our Foolish author…

Read more »

ISA coins
Investing Articles

Decided not to bother with a Stocks and Shares ISA? You might be missing these 3 things!

With a fresh annual allowance for contributing to a Stocks and Shares ISA upon us, what might people who don't…

Read more »

GSK scientist holding lab syringe
Investing Articles

Why is everyone buying GSK shares?

GSK shares have been outperforming the FTSE 100 in 2026. Paul Summers takes a closer look and asks whether this…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

£10,000 invested in easyJet shares at the start of 2026 is now worth…

Anyone buying easyJet shares will have endured a rough ride since January. Paul Summers wonders whether things could get even…

Read more »

Close-up of a woman holding modern polymer ten, twenty and fifty pound notes.
Investing Articles

5 years ago, £5,000 bought 2,645 Barclays shares. But how many would it buy now?

Despite delivering an impressive return since April 2021, Barclays' shares have lagged the FTSE 100's other banks. James Beard considers…

Read more »

Side of boat fuelled by gas to liquids, advertising Shell GTL Fuel
Investing Articles

5 years ago, £5,000 bought 354 Shell shares. But how many would it buy now?

When it comes to Shell’s numbers, most of them are impressive. And it’s no different when looking at the recent…

Read more »

A rear view of a female in a bright yellow coat walking along the historic street known as The Shambles in York, UK which is a popular tourist destination in this Yorkshire city.
Investing Articles

I asked ChatGPT if I should buy Aviva, Diageo or BAE Systems stock and it said…

Aviva, Diageo and BAE Systems shares are popular FTSE 100 picks. But which of the three does ChatGPT like the…

Read more »

Tesla car at super charger station
Investing Articles

SpaceX’s IPO threatens to leave the Tesla share price on the forecourt

As Elon Musk starts fuelling the engines for a SpaceX IPO, could the Tesla share price get left in the…

Read more »