Today I am highlighting the main issues that look set to trouble Barclays (LSE: BARC).
Misconduct mayhem
A persistent problem for Barclays in recent years has been the scale of financial penalties imposed on it, for a wide range of misdeeds.
The bank has been forced to shell out a fortune in fines related to the fixing of currency and Libor markets, for example, and more recently swallowed a $70m fine related to dodgy operations across its ‘dark pool’ trading platform.
But the saga is far from over, with Barclays warning this month that its operations across the US, Asia and South Africa are under investigation for a litany of further issues.
Of course the PPI problem, in particular, is a major drain on Barclays, the bank having stashed away a further £1.45bn during the fourth quarter alone to cover claims. And I expect total provisions so far of £7.4bn to keep rising as the FCA’s proposed claims deadline in 2018 comes into view.
Dividend disappoints
The impact of these colossal costs has forced Barclays to slash the dividend through to the close of 2017. The bank expects to pay 3p per share to shareholders during this period, down from 6.5p in each of the past four years.
Consequently Barclays boasts a yield of just 1.8%, falling well short of many of its rivals — Lloyds and HSBC offer yields of 5.9% and 7.9% respectively, for example.
Restructuring rattles
News of fresh restructuring has also rattled investor nerves recently, the bank announcing that it would be cut in two between Barclays UK and Barclays Corporate and International.
Although required under ‘ringfencing’ rules, the move naturally raises fears of further colossal costs, not to mention other transitory problems as the changes kick in.
On top of this, many investors are concerned by Barclays’s decision to drastically reduce its operations across lucrative emerging markets. The bank is preparing to hive-off its stake in Barclays Africa Group, giving truth to the rumours of recent months, and follows news that Barclays is pulling its Investment Bank out of several territories in Asia.
So is Barclays a ‘buy’?
But while these issues all merit serious attention, I believe there are still plenty of reasons to get excited about Barclays.
The company’s ongoing bid to slash costs saw operating expenses fall 6% last year, to just under £17bn, and costs should continue to fall thanks to improving digitalisation across the business and the steady stream of branch closures.
Meanwhile, Barclays’ renewed focus on the relatively-stable UK and US economies will come as huge relief for risk-averse investors. And while a reduction in its developing market footprint undermines the firm’s long-term earnings potential to some extent, a seemingly-sensible approach to revamping its Investment Bank could still deliver stunning returns in the years ahead.
The City expects the business to report an 11% earnings advance in 2016 alone, producing an ultra-low P/E rating of 8.7 times. To me, this suggests that the risks facing Barclays are currently baked into the price, leaving plenty of upside for long-term investors to enjoy.