Shares in Barclays (LSE: BARC) (NYSE: BCS.US) edged lower this morning despite the bank’s adjusted pre-tax profits rising by 9% to £1,848m during the first quarter of 2015, while operating expenses fell by 7%.
The flies in the ointment, as always, were the slow speed of Barclays’ progress, and the vast costs associated with the bank’s alleged past misdeeds. During the first quarter, Barclays added an additional £800m to its provisions for the cost of foreign exchange rigging investigations, taking the total provision to £2,050m.
Barclays also set aside another £150m for PPI compensation, and the combination of these new provisions dragged the bank’s reported profits down by 26% to £1,337m.
Progress behind the scenes?
Today’s results did contain a number of positives: pre-tax profits from the bank’s investment division rose by 37%; those from Africa Banking were up 23% and from the UK bank by 14%. The adjusted cost: income ratio fell from 67% to 64%, highlighting ongoing progress with cost savings.
These gains were reflected in the bank’s adjusted return on average shareholders’ equity, which rose to 7.6%, up from 6.5% during the first quarter of 2014. That’s still lower than I’d like to see, but it’s a welcome improvement.
There was good news on the capital front, too: Barclays’ Common Equity Tier 1 (CET1) ratio rose from 10.3%, at the end of 2014, to 10.6%.
The only problem is that this is all taking so long: shareholders, including me, need to ask whether we could earn more attractive returns on our money elsewhere.
Patience could pay off
Today’s results suggest Barclays’ full-year results should be in line with current forecasts: the bank reported adjusted earnings per share of 6.5p, versus full-year forecasts for earnings per share of 24.9p.
That means Barclays trades on a 2015 forecast P/E of 10.5 with a prospective yield of 3.3%, falling to a P/E of 8.8 and a yield of 4.5% in 2016. Although better yields are available elsewhere, Barclays’ low P/E rating and rising yield is attractive, in my view.
Another attraction is that Barclays’ shares continue to trade at a substantial discount to their book value: today’s results give a book value of 337p per share, 28% above the current share price. I expect this gap to gradually close.
This missing ingredient
Investors have been quite patient as Barclays’ chief executive Antony Jenkins has attempted to turn the group around: one man who may be slightly less patient is the bank’s new chairman, John McFarlane.
Mr McFarlane’s name may be familiar to you from his previous chairmanship, at Aviva, where he laid the foundations of a turnaround that has seen the bank’s share price rise by 78% in two years.
A repeat performance cannot be guaranteed, but Mr McFarlane’s reputation for decisive action and his strong track record in the financial sector suggests that he deserves the benefit of the doubt: I intend to hold onto my Barclays shares, and continue to rate the bank as a solid medium-term buy.