Buy Barclays for income

As with its peers, restructuring costs, loan impairments and misconduct charges have been the major impediment to profitability for Barclays in recent years. Its simplification plan – which involved hiving off its non-core assets, scaling back the investment bank and focusing on UK retail banking – resulted in a plethora of one-off costs during the past three years. It has been forced to book hefty losses on the disposal of some of its non-core businesses, including £580m for its Italian, Spanish and Portuguese businesses in 2015. That was in addition to a £2.5bn loss on the sale of its majority stake in Barclays Africa.

However, the non-core business unit was finally closed last year, after management decided to accelerate its run down. That’s not only resulted in a reduction in operating expenses, but has also helped reduce risk-weighted assets (RWAs) by more than a fifth during the past three years. In turn, the CET1 ratio has been pushed up to 13.3 per cent at the end of December, surpassing management’s 13 per cent target.

Like Lloyds Banking (LLOY), which also has substantial UK retail banking operations, another major headwind to profit growth during recent years have has been provision for the mis-selling of payment protection insurance (PPI). Last year, it incurred £700m of PPI charges and carries a £1.6bn provision related to the scandal. But a line will soon be drawn under this matter, with the deadline for claims set for 29 August 2019 by the Financial Conduct Authority. The group has also finally reached settlement with the US Department of Justice over a civil complaint relating to the sale of residential mortgage-backed securities in the two years prior to the financial crisis. It will pay $2bn (£1.4bn) to be recognised during the first quarter of this year, which will also result in a manageable 45-basis point reduction in its CET1 ratio.

Unfortunately, skeletons continue to pop out of the closet. The bank and the parent company were recently charged by the Serious Fraud Office for unlawful financial assistance over its $3bn loan to the state of Qatar in 2008. Barclays plc is also charged with two counts of conspiring to commit fraud by false representation. Both parties deny all charges, but there remains a risk of further misconduct-related charges. However, analysts at Shore Capital put a 240p fair value on the shares even after applying a 15 per cent haircut to reflect the risk of all legacy conduct and litigation matters.

Growth has also been a struggle in recent years. Barclays' investment banking business was the biggest impediment last year, with investment banking income down 6 per cent to £9.9bn. Its markets business suffered from lower volatility, which resulted in a 15 per cent decline in income. For consumer cards and payments, an 18 per cent uplift in credit impairments and other provisions resulted in a decline in pre-tax profit of almost a fifth. However, its core UK business has been putting in a steadier performance, with its net interest income rising marginally thanks to deposit pricing initiatives. While admittedly uninspiring, this trading, combined with the stronger balance sheet, should be enough to support dividend forecasts, and expectations of a small increase in UK interest rates in May should also help margins.