The PPI scandal just won’t go away. Figures released today show that Barclays (LSE: BARC) was forced to set aside an extra £1.4bn during the third quarter.
The good news is that this should be the final provision for this long-running problem. The PPI claims deadline in August prompted a surge of claims, but no more can be made.
In this article, I want to give my verdict on the 329-year old bank and explain why I think now could be a good time to buy BARC shares.
A mixed picture
Today’s third-quarter figures were dominated by the latest hit from PPI, which knocked Barclays’ third-quarter pre-tax profit down to just £246m. But if we ignore misconduct charges, pre-tax profit for the three-month period rose by about 14% to £1.8bn.
However, quarterly figures can be very volatile. I prefer to take a broader look at the figures for the first nine months of the year. These show a rather weaker performance. Pre-tax profit — excluding misconduct charges — fell by 6% to £4.9bn during the first nine months of the year, compared to the same period in 2018.
Barclays’ return on tangible equity (RoTE), a key measure of profitability, dropped from 11.1% to 9.7%.
What do today’s results tell us?
Today’s figures don’t flag up any new problems, in my opinion. However, they do highlight some areas of concern.
One specific problem is that intense competition in the mortgage market means that even though the bank is lending more, it’s doing so at lower profit margins.
That’s one of the reasons why the return on tangible equity has fallen this year. Like its rivals, Barclays is targeting an increase in RoTE. Seeing this metric falling isn’t ideal.
Indeed, this is one of the main messages from today’s report. The bank is targeting RoTE of more than 9% in 2019, and 10% in 2020.
But although today’s nine-month figure of 9.7% suggests it should be easy to meet this target in 2019, the outlook for 2020 is less certain. Management now says that “it has become more challenging to achieve these targets”, especially for 2020.
Why I’d buy
Banks are struggling with the risk of slower economic growth and the impact of ultra-low interest rates. Interest rates are even negative in some European countries. It’s a crazy situation I never knew would be possible until a few years ago.
Alongside this, the UK mortgage market has become ultra-competitive. Lending to consumers is one of the few areas that remain profitable.
The near-term outlook for Barclays is uncertain. Based on today’s announcement, I think there’s a risk that profits will be flat or even slightly lower in 2020. However, I don’t think investors need to worry about the risk of a 2009-style financial collapse. Barclays — like others — has strengthened its balance sheet significantly over the last decade.
The current situation won’t go on forever. I’m not sure what the outcome will be, but on balance I think the current period of weakness is likely to be a buying opportunity. Barclays’ shares trade on just 7.6 times forecast earnings, with a dividend yield of 5%. I continue to rate the bank as a long-term buy.
