The performance of Barclays’ (BARC) shares during the past 12 months has been conspicuously poor compared with its UK-listed peers. Shareholders would have been glad, then, that news the Serious Fraud Office (SFO) is extending the scope of charges relating to the bank’s 2008 capital-raising failed to disturb its share price.
The SFO has brought a charge of unlawful financial assistance against Barclays over the $3bn (£2.1bn) loan made to the state of Qatar in November 2008. That was around the time the banking group’s second fundraising – aimed at preventing a government bailout – was closing. UK companies are generally disallowed from lending money to third-parties if the purpose is to buy shares in that company.
The SFO had already charged Barclays PLC with two counts of conspiring to commit fraud by false representations relating to two so-called advisory services agreements with Qatar Holding – part of the state’s sovereign wealth fund – in June and October 2008, and a further count of unlawful financial assistance relating to the November loan. Barclays Bank and its parent company said they intend to defend the respective charges brought against them and that they don't “expect there to be an impact on its ability to serve its customers and clients as a consequence of the charge having been brought”.
Investor reaction may have been muted, but the charge levelled against Barclays Bank is concerning, given that that subsidiary must pass the “fit and proper” test to keep its banking licence. Still, the UK lender is no stranger to litigation. It's more perturbing for shareholders that, Barclays – along with two of its executives – is also being sued by the US Department of Justice over allegedly fraudulent mortgage-backed securities between 2005 and 2007. That’s a complaint that Barclays has rejected as "disconnected from the facts", and said it would "vigorously defend". Investec analyst Ian Gordon has accounted for a settlement of $2bn in his 2018 forecasts, to be taken as a provision that year.
But legal disputes are not the only matter holding down the share price. The weak performance of the investment banking operations during the past three-quarters is helping to prove the naysayers right. Historically low levels of volatility in 2017 have held down the business’s returns on average equity (ROAE), which declined to 8.4 per cent during the first nine months, yet accounted for almost half its allocated tangible equity. That’s compared with a ROAE of 9.4 per cent by retail-focused Barclays UK – such is the high-cost risk of investment banking. Analysts expect fourth quarter investment banking income to decline year-on year.
Given the lacklustre growth of net interest income on the retail side, plus the underperformance of its investment bank, management’s guidance for returns on tangible equity – of north of 10 per cent by 2020 and 9 per cent by 2019 (excluding litigation and conduct costs) – seem like a stretch.
