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Barclays buybacks make sense

If the bank’s shares are worth holding, they need to be more than just a dividend stock
Barclays buybacks make sense
  • Adjusted pre-tax profits well ahead of market forecasts
  • 1p dividend supplemented by buy back worth up to £700m

Earlier this month, we asked whether the prospects for bank stocks were looking up. Barclays (BARC), the first major high-street lender to report full-year numbers for 2020, has given a mixed if cautiously positive answer to that question.

The market’s reaction to these results suggested otherwise, likely owing to the final dividend of 1p, far short of a possibly-outdated consensus analyst forecast for 3.5p.

It’s a shame if that was the case, as a light cash pay-out has looked likely ever since regulators straightjacketed banks’ return to distributions in December. Plus, shareholders have now been promised up to £700m of buybacks, thereby lifting the total equivalent return for the year to 5p a share.

Given the circumstances and strictures, there’s not much more investors could have hoped for. But with the stock at a 45 per cent discount to tangible net asset value (TNAV), share repurchases also look a better use of cash, as inconvenient as this may be to some income portfolios.

Impressively, given everything that has happened in between, TNAV also rose 3 per cent since December 2019. Other key balance sheet and capital items moved in the right direction too: deposits soared 16 per cent to £481bn, loans edged 1 per cent higher to £343bn, and the common equity tier one ratio lifted 130 basis points to 15.1 per cent.

Capital adequacy therefore looks strong, one year after Covid-19 crept onto the agendas of UK banks’ risk committees. For Barclays, the running toll of the pandemic’s financial stresses is most clearly spelled out in £4.8bn of credit impairment charges for the year, of which a further £492m came in the fourth quarter.

Of the total, just over two-thirds of group-wide provisions were incurred in the international division. That had the effect of erasing the 65 per cent surge in trading income in the investment bank, though the final tally – a 12 per cent dip in Barclays International’s pre-tax profits and a 7.1 per cent return on equity – was a commendable performance, and all-but vindicates the stubborn defence of the higher-risk, higher-reward division.

The busyness of fixed income and equity trading desks – or kitchen tables, as is now traders’ practice – doesn't appear to have been matched with fat pay packets, even as Barclays’ market share again grew, to 4.9 per cent. As a result, operating costs contracted 4 per cent in the period, thereby helping to lower the division’s cost-to-income ratio from 64 to 57 per cent.

Exclude litigation and conduct charges, and the same ratio was static at 63 per cent at the group level. That’s encouraging after further declines in the net interest margin, though getting below 60 per cent will likely require branch closures in the retail bank, and a fair wind for the investment bank. A push into wealth management, hinted in these results, offers a third path. We await further details. Hold.

Last IC View: Hold, 112p, 23 Oct 2020

BARCLAYS (BARC)   
ORD PRICE:149pMARKET VALUE:£25.8bn
TOUCH:148.5-149p12-MONTH HIGH:184pLOW: 73p
DIVIDEND YIELD:0.7%PE RATIO:17
NET ASSET VALUE:379pLEVERAGE22.8
Year to 31 DecTotal operating income (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201621.53.239.33.0
201721.13.54-10.33.0
201821.13.499.46.5
201921.64.3614.39.0
202021.83.078.81.0
% change+1-30-38-89
Ex-div:25 Feb   
Payment:1 Apr