I have spent no little time warning of the difficulties facing banks with significant UK exposure such as Barclays (LSE: BARC).
The FTSE 100 business may have significant operations in the US, however it remains dependent upon strong economic conditions in Britain to keep growing earnings.
Latest GDP figures may have shown quarter-on-quarter growth in its home country rising from 0.2% in Q1 to 0.4% in Q2, but this is not exactly suggestive of a robust economic climate. Indeed, the Office for National Statistics numbers showed economic expansion cooingl from 0.3% in May to 0.1% in June, giving broker predictions of further slippage in the remainder of the year plenty of credibility.
PPI pains
As if a rough trading environment was not enough to contend with, the age-old problem of PPI-related misconduct is still to relinquish its grip on Britain’s banks.
Sure, next August’s deadline for new claims means that there is at last some light at the end of the tunnel for the likes of Barclays. But don’t be fooled: there is still plenty of time for the business to endure more earnings-crushing costs.
The newsflow surrounding this issue certainly hasn’t been favourable for the Footsie firm. It stashed away an extra £400m in the first half of 2018, taking total provisions to £9.6bn as of June. Barclays said that it “views its current PPI provision as appropriate, but will continue to closely monitor complaint trends and the associated provision adequacy.”
I’m not sure that this optimistic assessment is all that reassuring, though. Barclays had previously advised of the impact that the Financial Conduct Authority’s ubiquitous PPI advertising campaigns have had in pushing claims numbers higher again, and this was illustrated when the bank advised that it had received and processed another 2.3m claims between January and June.
It’s not a stretch to imagine the number of claimants surging in the final year of the redress period amid an inevitable media frenzy. But this is, of course, not the only misconduct headache Barclays is still having to deal with.
The £1.4bn settlement Barclays brokered with the US Justice Department in March over the sale of mortgage-backed securities prior to the financial crisis a decade ago played a large part in the bank’s first-half profits sinking 29% year-on-year to £1.7bn. And further hefty charges could be coming down the line after the Serious Fraud Office last month applied to the high Court to reinstate charges related to fundraising involving Qatar during the crisis.
Cheap but chilling
But aren’t these problems factored into the Barclays share price? Well no, in my opinion.
Sure, the business may carry a conventionally cheap forward P/E ratio of 9.4 times. However, Barclays has long traded below the benchmark of 10 times or below that commonly reflects high-risk stocks, but this hasn’t stopped its market value from steadily eroding (down by 8% since the start of 2018 alone).
City analysts have been busy downgrading their earnings estimates for the bank in recent months. And the chances of more painful reductions being as high as they are makes Barclays an unappealing stock pick right now.