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Don’t Let The City Mislead You About Barclays PLC

Barclays (LSE: BARC) (NYSE: BCS.US) is probably one of the UK’s most hated banks right now. Indeed, it seems as if there is a new lawsuit, or set of fines handed to the bank almost every week, while customers leave in droves and staff morale at the group sits at an all-time low.

However, the City still believes that Barclays will report a pre-tax profit of £6.6bn this year, which translates into 22p per share, up 32% from the figure reported last year.

Optimistic Barclays

Unfortunately it seems as if the City’s forecasts for this year are rather optimistic. This is because, after the dark pool debacle, customers of Barclays’ investment bank are turning their company in record numbers.

Barclays’ investment bank contributed around 50% of net income for the group as a whole during 2013. So, even a slight reduction in customer numbers at the bank will have an effect on group profits. 

The dark pool scandal has sent Barclays’ customers running for the exit. Big clients such as, Deutsche Bank, Credit Suisse and Royal Bank of Canada have pulled their business from Barclays’ dark pool. What’s more, it’s likely that these customers won’t return unless Barclays can convince them it has changed. 

Hefty penalties 

Barclays has stated that it will fight the allegations that it mislead customers about the safety of its dark pool, although the bank is already feeling the pain from allegations. Further, the bank is facing other allegations that could ultimately cost the bank billions in fines.

In particular, Barclays has recently been found to have helped hedge funds avoid billions in taxes and threatening the stability of the financial system. With regulators seeking to make an example of banks, Barclays could find itself having to payout a hefty fine following these charges. 

Then there is the issue of Barclays’ tier one capital ratio, (financial cushion) which at the end of the first quarter stood at only 9.6%, below the level of 10% considered adequate by regulators. Hefty fines could erode this capital cushion putting Barclays in a precarious position.

 As of yet, another rights issue to bolster capital levels is not being discussed, but if things get really bad, Barclays could be forced to ask shareholders for extra cash once again. 

Should you buy in?

So overall, Barclays may seem attractive at present as the company trades at a forward P/E of 9.9. However, it’s likely that City forecasts will be revised downwards over the next few months as Barclays struggles to retain customers and pay hefty fines. 

Still, it’s up to you whether you decide to buy, sell, or hold Barclays and I’d strongly suggest you look a little closer at the company before making any trading decision.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.