The latest interest rate cut is yet another reason I’m avoiding Barclays plc

Just when you thought things couldn’t get any worse for Barclays plc (LON: BARC), they do.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s difficult to feel too much sympathy for someone whose base pay is £1.2m a year, but even I’m beginning to commiserate with Barclays (LSE: BARC) CEO Jes Staley after the latest hit to the banking giant. The BoE’s decision to cut reserve interest rates by 25 basis points was hardly a surprise following the Brexit vote but the first rate cut in seven years will lower net interest margin all the same.

Adding insult to injury, this latest setback came just days after Barclays posted better than expected first-half results that had boosted share prices by over 5%. Of course, this being a large bank’s results, ‘even better than expected’ meant a 21% slide in year-on-year pre-tax profits.

The RoE issue

This is particularly bad news for Barclays because the bank has up until now been able to rely on solid results from its UK retail banking arm to compensate for poor performance at other divisions. Underlying return on tangible equity (RoE) on UK operations was an astounding 19.4% in the past half year, but this was already lower than the 21.9% posted in the same period a year ago.

If lower interest rates on mortgages and other loans, together with the ill effects of the expected post-Brexit slowdown, cause UK retail banking RoE to continue dropping then investors should worry. This is because phenomenal results from the UK were more than overshadowed by poor performance in its bad asset book and investment banking arm, which dragged overall RoE down to 4.8% over the last six months.

The divergent fortunes of its mundane retail banking operations compared to sprawling global assets are the crux of the problem facing Barclays as its shares still trade at less than a fifth of their pre-Financial Crisis price. Staley’s answer so far has been to sell the African assets that were purchased just a few years earlier. While this process is going well, with 12% of Barclays Africa offloaded already, it still leaves £46.7bn in bad assets on the books alongside the relatively low-return investment banking division.

Progress is being made in winding down the non-core bad asset division, but it will continue to weigh on overall returns for years to come, as it did this past half year with a £1.9bn loss. The bigger long-term issue is what to do with the investment bank, where RoE fell to 8.4% from 9.8% this time last year. Although this division is still profitable, it gobbles up nearly three times the risk-weighted assets of UK retail operations. This is money that could otherwise be deployed to more profitable areas or returned to shareholders.

With no end in sight to the struggles of the investment bank, lower net interest margin all but inevitable, high operating costs continuing at all divisions and the potential side effects of any post-Brexit slowdown on Barclays UK and you have a recipe for one company i’ll continue to avoid like the plague for now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »