The failure of banking stocks to recover is a continuing source of wonder, given that big names such as Lloyds Banking Group combine dazzlingly high yields with temptingly low valuations.
Falling, falling
Barclays (LSE: BARC) is another that has failed to make progress, its share price falling another 16% over the past 12 months, and 25% over two years. The £27.6bn FTSE 100 group has, like the rest of the sector, been hit by Brexit, as well as low interest rates, the global economic slowdown, lingering after-effects of the financial crisis, and the subsequent regulatory onslaught.
These continue to hit revenues with the bank reporting a 2% drop in the first quarter. Even more worryingly, credit impairment charges and other provisions jumped 56% to £448m, and that’s while the economy still growing.
Activist threat
Despite that, Barclays Group did post a profit before tax of £1.5bn. This looks good against Q1 2018’s £200m loss (although that was disproportionately hit by litigation and conduct charges).
Barclays International continues to pose a conundrum, as profits fall there too. But management is reluctant to offload its investment banking arm, one of the last remaining European remnants following the departure of Deutsche. Activist investor Edward Bramson, who has a 5.5% stake, is on the case.
Low interest
The cloud hanging over the sector is confirmed by a valuation of just 7.2 times forecast earnings, well below the 17.85% seen on the FTSE 100 as a whole. This either looks like a tempting opportunity or a value trap, depending on your mood.
The Barclays share price tempts due to its lowly valuation and 4.7% forecast yield, covered 2.9 times by earnings. Next year, that’s forecast to hit 5.4%. Brexit and the global slowdown remain a menace and with interest rates looking to head back down rather than up, the bank could struggle to improve those all-important net interest margins.
Despite these worries, I still believes Barclays merits a place in a well-balanced portfolio.
IG for me
FTSE 250-listed online trading company IG Group Holdings (LSE: IGG) is steady today despite reporting a 16% fall in its net trading revenue to £476.9m in its preliminary results for the year to 31 May.
The slippage is due to previously-announced European Securities and Markets Authority (ESMA) restrictions on the trading of CFDs and binary options, as well as “less favourable” market conditions, particularly in the second half of 2019.
Recovery trade
The FTSE 250 group also posted a 2% drop in total operating costs to £284.3m, while operating profits fell 31% to £192.9m. The bad news was evidently priced in, as the stock has fallen a third over the last year, and investors are looking forwards as management expects to restore revenue growth in 2020, and continues to recruit and retain a high quality client base.
IG has also maintained its full-year dividend of 43.2p per share, and will continue to hold it there until earnings allow progression. That means the £2.1bn group has a whopping forecast yield of 7.1%, even if cover is thin at 0.9. No wonder Paul Summers has been scooping it up.
City analysts anticipate a return to earnings growth in 2021. The dividend should give ample reward while you wait for trading conditions to swing back in IG’s favour.
