Barclays (LSE: BARC) published its half-year results today, beating City forecasts with a 43% rise in reported profits, which rose to £1.6bn from £1.1bn during the first half of 2014, leading to a c.2% increase in its share price in early trade.
Overall, the figures were more of a mixed bag. Costs remain too high and returns too low. It’s clear that new chairman John McFarlane was right when he told investors that the bank’s turnaround needs to be accelerated.
To help fund this faster rate of change, Barclays has decided to leave the full-year dividend unchanged at 6.5p this year. This will be a disappointment for shareholders who were banking on the forecast increase to 7.7p, but seems a sensible measure.
Profitability
One of Barclays’ problems is that its returns are too low. According to today’s results, the bank’s return on equity rose to 5.9% during the first half, compared to 4.2% last year.
That’s a welcome increase, but it’s still well below the bank’s double-digit target. Similarly, while the cost:income ratio fell from 73% to 70%, it’s still well above Mr McFarlane’s target in the mid-50s, a level already achieved by Lloyds Banking Group.
Barclays’ results have been showing this kind of too-slow improvement for some time now, much to the frustration of investors. Compounding this has been continual rises in misconduct charges — in today’s results, Barclays announced additional provisions of £1.8bn, mainly for UK customer redress and investigations into allegations of rate-rigging.
Financial strength
Barclays has at least hit one of its 2016 targets. The bank’s Common Equity Tier 1 (CET1) ratio rose to 11.1% during the first half of the year, up from 10.3% at the end of 2014. This is comfortably above the 10% threshold considered as risky by investors.
One of the factors behind this improvement is the gradual run-down of the bank’s non-core division, where risk-weighted assets have fallen from £75bn to £57bn over the last six months.
Mr McFarlane said today that he intends to accelerate this process so that risk-weighted assets will be reduced to £20bn in 2017, when the non-core division will be incorporated back into the bank’s core operations.
Interestingly for value investors, Barclays’ recent gains mean that the bank’s shares now trade in-line with their tangible net asset value of 279p per share. This suggests investor confidence is returning. As a shareholder myself, my next target is the bank’s book value of 328p per share.
The new plan
Mr McFarlane has disposed of chief executive Antony Jenkins and is now effectively in sole charge at Barclays. Investors have high expectations.
One area that could return to favour is Barclays’ investment bank, which reported a 36% rise in pre-tax profits for the first half of the year. This earned conspicuous praise from Mr McFarlane, who said he was “personally pleased” with the division.
Is Barclays still a buy?
Barclays’ shares look reasonably priced on 11 times 2015 forecast earnings and a yield of 2.3%. In my view, they remain a buy.