Barclays (LSE: BARC) rose by 4% when markets opened this morning , despite the bank’s first-quarter results showing that the group’s pre-tax profits fell by 25% to £793m.
Barclays said that pre-tax profits in its core division rose by 18% to £1,608m, while return on tangible equity, a key measure of profit, rose from 7.1% to 9.9%. However, these gains were offset by Barclays’ non-core division, where pre-tax losses rose to £815m from £310m during the same period last year. The group’s non-core division contains businesses Barclays is trying to wind down or sell.
Analysts took comfort from the improved performance of Barclays’ core division and from chief executive Jes Staley’s promise to speed up the disposal of unwanted assets. Mr Staley says that Barclays is accelerating the non-core rundown. Discussions are underway for the potential disposal of a majority stake in Barclays Africa, as well as some of the bank’s European businesses.
Mr Staley believes that the costs and unwanted assets relating to Barclays’ non-core businesses are having “a direct impact on our profitability” and “mask the true performance of our strong Core business”. Today’s results certainly suggest that Barclays would be a much more profitable and investable bank without its non-core division.
What’s less clear is how long the disposal process will take and what losses Barclays will have to accept in order to complete it. The latest consensus forecasts before today’s results suggest that Barclays will report adjusted earnings — which largely exclude non-core losses — of 15.5p per share for 2016. A dividend of 3.5p per share is expected.
Today’s results don’t seem likely to change these forecasts, which give the bank’s stock a forecast P/E of 11.4 and a prospective dividend yield of 2.0%. Substantial progress is expected for 2017, but my feeling is that it’s probably too soon to be able to rely on forecasts for next year.
Now may be a good time to start buying into the Barclays recovery story, but there have been false dawns before. You may need to be patient.
A more profitable alternative?
Spanish bank Banco Santander (LSE: BNC) climbed 3% this morning after the bank reported a first-quarter profit of €1,633m, a 5% fall from the same period last year.
Santander’s chief executive Ana BotÃn said she was confident the bank would be able to increase its cash dividend per share by 10% this year. Based on current forecasts, Santander is expected to pay a dividend of €0.21 for 2016, giving a potential yield of 4.6%.
Today’s results were also a reminder of how important the UK is to Santander. Profits from the bank’s UK operations accounted for 23% of Santander’s total profits during the first quarter. This helped offset a 10% fall in profit in Santander’s home market of Spain, which accounted for just 15% of total profit.
Santander currently trades on a 2016 forecast P/E of 9.9, falling to 9.0 in 2017. A forecast yield of 4.5% is expected to rise to 4.6% in 2017. In my view this looks reasonably good value, although the potential for big gains may be limited.