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Barclays' turnaround stalled

News that UK watchdogs are probing Mr Staley's transparency presents a fresh headache for the lender
February 13, 2020

For Jes Staley, 2019 was “the inflection year” for Barclays’ (BARC) turnaround story, after four years of “correcting challenges that arose because of our past”. Unfortunately for the bank and its board, Mr Staley’s own past suddenly presents a new, very awkward challenge.

IC TIP: Buy at 176p

At issue is the chief executive’s characterisation of his professional relationship with convicted paedophile Jeffrey Epstein, dating back to Mr Staley’s time as head of JP Morgan’s private banking division in the early noughties. Last summer, amid heightened media scrutiny of those ties, the US native told Barclays’ board he had had “no contact whatsoever with Mr Epstein” at any time since taking up his role as chief executive.

After an internal review, the lender’s directors found Mr Staley’s testimony had been sufficiently transparent, and unanimously recommended him for re-election. But the Financial Conduct Authority and the Prudential Regulation Authority are not yet satisfied, and have left their regulatory probe open.

In an interview with Bloomberg News, Mr Staley sought to downplay the news, saying the bank will let the investigation “run its course”. Though clearly a reputational knock, particularly after the chief executive’s attempts to unmask a whistle-blower led to sanction in 2018, it is near-impossible for investors to gauge the risks of this development.

Regardless, neither full-year results nor forward guidance suggest a dramatic turnaround.

Strip out £1.85bn of litigation and conduct charges for 2019 – largely stemming from a surge in last-minute PPI claims – and the group’s return on tangible equity crept up 50 basis points to 9 per cent. However, hopes of hitting a 10 per cent target this year have been “has become more challenging”, despite the group’s promises to double down on capital-light investments in wealth management and payments.

The fourth quarter also provided more conflicting evidence that the corporate and investment bank can act as a hedge against the low interest rate environment. Here, pre-tax profits improved to £359m for the fourth quarter, although a full-year return on average equity of 8 per cent – again excluding litigation charges – shows the division still remains a drag on group profitability.

Consensus forecasts are for adjusted earnings of 23.6p a share in 2020, and 24.7p in 2021.

BARCLAYS (BARC)   
ORD PRICE:176pMARKET VALUE:£30.5bn
TOUCH:176-176.2p12-MONTH HIGH:193pLOW: 131p
DIVIDEND YIELD:5.1%PE RATIO:12
NET ASSET VALUE:372pLEVERAGE19.7
Year to 31 DecTotal operating income (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201522.01.15-3.76.5
201621.53.239.33.0
201721.13.54-10.33.0
201821.13.499.46.5
201921.64.3614.39.0
% change+2+25+52+38
Ex-div:27 Feb   
Payment:3 Apr