Today I am highlighting a few of the key issues investors should consider before buying banking giant Barclays (LSE: BARC) (NYSE: BCS.US).
Restructuring ticking along nicely
Barclays’ Transform package, introduced back in early 2013 in a bid to erase the excesses of the Bob Diamond regime, has delivered tremendous gains across the business. Of course the programme was rolled to improve the bank’s battered reputation as much as deliver tangible gains, but it cannot be denied that costs continue to come down at a colossal rate — the firm’s latest financials showed total operating expenses slipped an extra 7% in January-March, to £4.1bn.
Not only has Barclays’ capital ratio benefited as a result, but the moves to slash head counts and branches has also supercharged the bank’s moves towards automation. With banking customers increasingly abandoning branch visits in favour of internet banking, the massive investment in its internet operations — not to mention championing ‘contactless’ payment hardware — is bound to pay off in attracting tech-savvy customers in the coming years.
Trouble at the top
Still, the unexpected booting of chief executive Antony Jenkins last week has raised questions over the future direction of the firm. Indeed, reports that the former bank chief’s vision of a risk-reduced, retail-focussed entity came under scrutiny from chairman John McFarlane suggest that the bank is undergoing a period of significant soul-searching over where Barclays sees itself in the coming years.
This boardroom intrigue was given fresh fuel today with news that McFarlane’s deputy Sir Michael Rake was falling on his sword, bringing to an end his seven-year tenure at the bank. Many have speculated that Jenkins’ sacking could lead to resuscitating Barclays’ Investment Bank in a bid to give the share price a shot in the arm. Regardless, McFarlane’s period at the helm — a role that could last until the end of the year — could lead to a very different future for the bank, for good or for bad.
Emerging markets promise big riches
Helped by an improving British economy, Barclays has enjoyed solid revenues growth in recent times. Core income advanced 2% in January-March to £6.4bn, helped by a slight uptick in Personal and Corporate Banking to £2.2bn and a more impressive 9% rise, to £1.1bn, at Barclaycard.
But investors should not overlook the huge potential of its Africa Banking division, and revenues here leapt 8% in the first quarter to £948m. This unit is now responsible for 16% of Barclays’ adjusted pre-tax profit, edging from 13% at the same point in 2014 and which I expect to continue heading higher — the firm is ramping up its licence applications on the continent to improve its exposure to these increasingly-populous, and crucially wealthy, regions.
Charges chugging higher
However, one major red mark against investing in Barclays is the uncertainty created by the ever-growing legal bill. The bank had to bang away another £150m during January-March in order to cover off PPI-related claims — taking the total put aside to a colossal £5.4bn — and added to the £800m charge chalked up as a result of previous manipulation of the forex markets.
Barclays also faces billions more in costs over the next few years related to the mis-selling of interest-rate hedging products, while it is also being dragged through the courts in New York concerning allegations of giving traders an advantage whilst using its “dark pool” trading platform. Despite Barclays’ very public attempts to put the past behind it, the costs of these previous misdeeds could remain a long-standing millstone for the balance sheet.