Barclays PLC – LON:BARC
Share Price – £1.71
Market cap – £28.8bn
Barclays reported Q1 results on Wednesday. Broadly speaking, the results met my expectations with the two year turnaround being on-track, and maybe even slightly ahead of my expectations at this point.
- Return on equity for core operations 10.7%.
- CET1 ratio dipped slightly to 11.3%.
- Non-core wind-down continues as expected.
- Expenses increased a little ahead this quarter.
- Tangible book value up to 286p (from 275p).
Barclaycard continues to be the star performer of the business, Barclays have made an acquisition in this area, buying the JetBlue card portfolio. Hopefully this is a nice bolt-on acquisition that makes sense. UK retail had a solid performance in the quarter, very little change to see here. Investment banking performance was mediocre, but did well in comparison to competitors. Management continue to be quietly confident on this front. I suppose being investment bankers at heart they are bound to be. Non-core was worse than expected with nearly have the loss from non-core generated by one item.
As expected, loss before tax increased to £815m, driven mostly by a fair value loss of £374m on ESHLA (Q415: loss of £156m)
This blow-out initially worried me a lot. Thankfully, on the conference call, the nature of the ESHLA loans was explained and how we could see future impacts on this portfolio.
Yes, so to step back, what goes on here is we have a portfolio of fixed rate loans that are marked to market using gilts rates, and then are hedged with interest rate swaps, so that package is exposed to movement in the gilt asset swap spread … if the spread doesn’t move literally at all over the full three months of a quarter, you see virtually no P&L necessarily coming through there
Management also said that the spreads on this portfolio have come in a bit since these numbers, so the problem hasn’t gotten any worse, and it may actually get better next quarter.
It also sounds like the Brexit vote could be having an impact here.
And the second thing is, of course, swap spreads will move around, and I think with the Brexit vote around June 23rd, it’ll be very hard to [predict]. You can make persuasive arguments that they could tighten a lot from here, or they could widen again. And we’ll manage through that.
One of the points I did not touch was the disposal of Barclays Africa, which picked up pace in the last week with multiple parties submitting their interest. This is good news, as it should mean that the bank can realise close to full market value for this disposal. I am also hoping that they will have a tax trick up their sleeves in order to realise most of the gain on this disposal.
The question of dividends was also raised on the call a number of times. Management refused to be drawn on anything beyond the stated expectation that they would not be fully restored until 2018. I believe that management may be purposely under-promising here. If Barclays Africa is able to be fully de-consolidated this year, then my rough numbers suggest that the CET1 requirement can be met by the end of this year. By 2016 year-end, I could see about 70-80% of the restructuring being complete. I wonder at that point, will they consider rewarding patient shareholders with some sort of special dividend on 2017?
Overall, I am happy enough with the results. I can understand a lot of the investor scepticism around Barclays. It’s very easy for a company to bundle all the money losing parts of the company into a non-core business line and tell investors that they are no longer relevant to reported results. What’s important here though is that Barclays are making a concerted effort to streamline the business into core profitable segments. For now, I will be continuing to hold, and I may look at buying in again should the share price below my initial cost position in this quarter.