It’s difficult to feel too much sympathy for someone whose base pay is £1.2m a year, but even I’m beginning to commiserate with Barclays (LSE: BARC) CEO Jes Staley after the latest hit to the banking giant. The BoE’s decision to cut reserve interest rates by 25 basis points was hardly a surprise following the Brexit vote but the first rate cut in seven years will lower net interest margin all the same.
Adding insult to injury, this latest setback came just days after Barclays posted better than expected first-half results that had boosted share prices by over 5%. Of course, this being a large bank’s results, ‘even better than expected’ meant a 21% slide in year-on-year pre-tax profits.
The RoE issue
This is particularly bad news for Barclays because the bank has up until now been able to rely on solid results from its UK retail banking arm to compensate for poor performance at other divisions. Underlying return on tangible equity (RoE) on UK operations was an astounding 19.4% in the past half year, but this was already lower than the 21.9% posted in the same period a year ago.
If lower interest rates on mortgages and other loans, together with the ill effects of the expected post-Brexit slowdown, cause UK retail banking RoE to continue dropping then investors should worry. This is because phenomenal results from the UK were more than overshadowed by poor performance in its bad asset book and investment banking arm, which dragged overall RoE down to 4.8% over the last six months.
The divergent fortunes of its mundane retail banking operations compared to sprawling global assets are the crux of the problem facing Barclays as its shares still trade at less than a fifth of their pre-Financial Crisis price. Staley’s answer so far has been to sell the African assets that were purchased just a few years earlier. While this process is going well, with 12% of Barclays Africa offloaded already, it still leaves £46.7bn in bad assets on the books alongside the relatively low-return investment banking division.
Progress is being made in winding down the non-core bad asset division, but it will continue to weigh on overall returns for years to come, as it did this past half year with a £1.9bn loss. The bigger long-term issue is what to do with the investment bank, where RoE fell to 8.4% from 9.8% this time last year. Although this division is still profitable, it gobbles up nearly three times the risk-weighted assets of UK retail operations. This is money that could otherwise be deployed to more profitable areas or returned to shareholders.
With no end in sight to the struggles of the investment bank, lower net interest margin all but inevitable, high operating costs continuing at all divisions and the potential side effects of any post-Brexit slowdown on Barclays UK and you have a recipe for one company i’ll continue to avoid like the plague for now.