The past few years have been miserable for shareholders of Barclays (LSE: BARC) as the bank’s share price has fallen over the period and its dividend has been trimmed, leaving investors without even the solace of Lloyds’ bumper payouts.
But with the bank’s shares now priced at only 0.55 times their book value, is Barclays a screaming bargain that’s too good to ignore?
A whole lot of nasties
Well, the group’s headline £1.9bn loss posted last year will have done little to win over sceptical investors, but underneath this poor result, the bank is finally making headway in repairing itself. Excluding a one-off charge due to the reduced US corporate tax rate, £1.2bn in further litigation and conduct expenses, and a healthy loss from the sale of its African retail bank, the group’s underlying return on tangible equity (RoTE) made good progress and was up from 3.6% to 5.6% year-on-year.
Of course, that’s a lot of adjusted items to exclude, but management repeated its confidence of achieving pre-litigation expense RoTE of 9% 2019 and >10% in 2020 and beyond. Compared to pre-crisis levels of returns, even these hoped-for results would be meagre and trail far behind current return levels posted by US banks, but they would still represent forward progress.
Still holding on to the anchor
However, that doesn’t make Barclays a bank that I’m in any hurry to own. My biggest problem is the continued tussle over whether to try and compete with US banks in trans-Atlantic investment banking, or to simply scale down and focus on the highly-profitable UK retail bank and credit card divisions it owns.
Thus far, CEO Jes Staley is still pumping capital into the investment bank that posted a ridiculously low RoTE of 1.1% last year that fell significantly due to the double whammy of increased costs and lower income. With regulators still in no hurry to loosen post-crisis regulations on banks’ trading operations, I see little scope for Barclays’ investment bank to turn things around in a hurry.
And this is a shame because the group’s Barclaycard and retail bank operations are solidly profitable. In 2017 the UK retail op posted a RoTE of 9.8%, while the international Barclaycard division notched up a 16.7% RoTE. Strip out the investment bank’s low returns and shareholders would have a profitable, well-capitalised business that could afford to pay out more than the miserly 3p dividend offered last year.
But with the FCA recently deciding not to force Staley’s removal over his attempts to twice unmask an internal whistleblower, it looks like he, and the investment bank, are here to stay. With that being the case, I reckon other investors will continue to highly discount Barclays’ share price for the time being. Together with the cyclical nature of the retail bank and the shaky outlook for the UK economy, this means I’ll be steering well clear of the shares for the foreseeable future.
