There’s no denying that Barclays’ (LSE: BARC) (NYSE: BCS.US) shares have been on a roller-coaster ride during the past 12 months.
This volatility has left investors who are new to the Barclays story asking, “how did we get here” and “what’s next for Barclays?” Well, here’s your one-stop guide to Barclays, outlining all you need to know.
How did we get here?
Barclays has made a number of mistakes during the past year and many investors have lost confidence in the bank.
Indeed, when Barclays asked shareholders for £5.8bn in cash last year by way of a rights issue to plug a near £13bn capital shortfall, many shareholders felt that they had been misled.
The bank then disappointed by announcing a 32% slump in operating profits for 2013 and a lowly return on equity of 4.5%. These returns were the lowest reported in Barclays’ peer group.
However, soon after release of these results, Barclays revealed that it was upping investment banking bonuses by 13%. Management argued that the bank could not retain staff unless it paid them more than the competition.
Then the bank’s troubles were compounded further, after the release of its first-quarter results. During the first quarter, Barclays’ investment banking income fell 41%, once again putting Barclays at the bottom of its peer group.
Where do we go from here?
Barclays is now trying to put its troubles behind it. The bank is in the middle of a restructuring effort named ‘Project Transform’, which is focused on cutting costs, improving relations with customers and increasing returns.
Additionally, Barclays’ is creating a bad bank, which will contain €90bn worth of risky assets from the investment bank. These risky assets include some commodities and emerging markets products along with complex derivatives. Operations from Italy, France, Spain and Portugal are also being placed within the bad bank.
This bad bank will allow Barclays to move its risky assets off the balance sheet and wind them down slowly, minimising losses.
Further, to reduce costs, Barclays is planning to cut tens of thousands of jobs over the next year or so.
In all, Project Transform will cost Barclays around £3.5bn to implement, which will hit the company’s profits in the short term. However, over the long term, Barclays will become a bank with less risk, a higher return on equity and wider profit margins.
Indeed, Barclays’ long-term return on equity is 12%, more than double the level reported last year. What’s more, management has stated that it will pay out 40% to 50% of net profit in dividends.
With City forecasts currently predicting earnings per share of 30.4p per share for 2015, this implies that a dividend payout of 15.2p could be on the cards, a yield of 6.3% based on current prices.
