Barclays At 30% Off
Unless you timed your entry point really well, Barclays (LSE: BARC) (NYSE: BCS.US) has been a lousy investment over the past five years. It is down 5% in that time, while the FTSE 100 has risen more than 50%. It fell 5% on Tuesday as well, on disappointing first-quarter results, which saw its investment banking arm profits halve from £1.31 billion to £668 million.
This wiped out the savings made on Barclays’ cost reduction programme, leaving the bank to report a 5% fall in adjusted profits before tax, of £1.69 billion. Today, you can buy Barclays at 239p, almost one-third off its year-high of 338p. The more Barclays struggles, the cheaper it gets, and the more I want to buy. But is there worse to come?
Big And Bad
Investment banking is certainly the biggest worry. US regulators are forcing foreign banks to pump yet more money into their Wall Street businesses, pushing up costs and driving down margins. It’s a sly form of protectionism, but Barclays can’t do much about that. If it wants to play with the big boys, it has to play by their rules. If you buy Barclays’ stock now, you’re taking a major gamble on its US fortunes.
Barclays also faces plenty of challenges at home. To reward the bankers it needs to win big in the US, it needs to pay US-style bonuses. You know how that plays in the UK press and in Parliament. An EU financial transactions tax won’t help. Nor does the fact that most people still hate Barclays, even if it didn’t need a bailout.
Fluffy And Friendly
So there are good reasons NOT to want to buy Barclays. Increasingly embattled chief executive Antony Jenkins is another one. He has charged himself with the task of making its UK retail arm look fluffy and friendly again, through the costly Project Transform. But this is a hard trick to pull off while simultaneously getting down and dirty in the US. In any case, most people don’t want to feel fluffy about Barclays. Deep down, they enjoy loathing the big banks.
Jenkins has notched up some successes. Cost-cutting continues apace, with operating expenses down £861 million to £4.43 billion, and profits from retail banking up 20% to £360 million. Credit impairment charges have improved, the core tier 1 ratio has crept up to 9.6%, and the stock is on a forecast yield of 3.4% for December (rising to 4.7% in December 2015). Rivals Lloyds Banking Group and Royal Bank of Scotland still don’t yield a bean.
Some will also see the recently announced ‘bad bank’ as good news, allowing Barclays to ditch its unwanted assets or bad loans, to focus on the parts of the business that are working.
Yes, markets are fretting about protectionist US regulators, and with reason. If they weren’t, you’d pay a lot more than 239p. If you want to add UK banking exposure to your portfolio then you have to be bold, and seize opportunities like these.
