The City has long had a love-hate relationship with banks making forays into investment banking and no lender has had more chops and changes to its trading arm in recent years than Barclays.
The commitment to its investment bank seemed to have been settled, though, when Barclays hired Jes Staley, a former investment banker and JP Morgan bigwig, as its chief executive in 2015, replacing the retail banker Antony Jenkins. The good times were apparently back for the old Barclays Capital business.
Then last month it emerged that the US activist investor Edward Bramson had become one of Barclays biggest shareholders, leading to speculation that he was targeting an overhaul of the company’s investment bank as part of a campaign to improve returns.
First-quarter results from Barclays published yesterday are unlikely to close the debate. Barclays investment bank reported its best quarterly income for four years and could point to bright spots in the divison, but it reported a group loss for the period, the consequence largely of a £1.4 billion settlement with US over allegations of misselling mortgage-backed securities.
A 21 per cent rise in income in the markets business, benefiting from recent volatility, helped push the division’s overall return on equity into double digits, ahead of its target of a 9 per cent return on tangible equity from 2019. The question is whether this is sustainable.
That said, in a world where the competition is dwindling — witness the rapid demise of investment banking at Deutsche Bank, often thought of as the German twin of Barclays — then there is reason to believe that a last-man-standing strategy might have merits. Barclays has espoused a transatlantic strategy based on having scale on Wall Street and in the City, unlike Deutsche’s global ambitions.
There is also reason to hope that many of what are euphemistically termed “legacy issues” facing Barclays are beginning to trail off. The US Department of Justice settlement in the last quarter closes the door on one of the most expensive financial scandals the bank has been involved in, though investors will remain nervous about the outcome of the UK’s Qatari fundraising prosecution and associated civil legal action.
The real issue for the bank is to start creating shareholder value. The steady erosion of the bank’s tangible net asset value in recent years from close to 400p in early 2012 to 251p six years later tells the story of the impact of regulation and accounting changes, as well as the costs of various regulatory settlements and the esemingly frequent need to top up its PPI compensation fund.
With PPI claims to be time-barred from August 2019 and regulatory changes now bedding in, the current valuation might well soon be seen as the nadir as the business enters a more normal earnings cycle and is able to retain, and pay out, a vastly higher proportion of what it makes than it has done in recent years.
Despite the latest costs, Barclays has insisted that its dividend remains safe, and this must give hope to those expecting further rises. At Investec, analysts have pencilled in a rise in the dividend from its current level of 6½p to around 25p by 2020, which put the shares on a yield of more than 5 per cent.
For now the strategy of Barclays looks relatively settled and as returns and payouts improve, the bank might well be able to persuade those who might back the American interloper to give them more time for their plans to bear fruit. Of course, one quarter does not a year make, but for now Mr Staley has done just enough to buy some time.
ADVICE Buy
WHY Returns could well be on the up and the stock still looks cheap
Kaz Minerals
Shares in Kaz Minerals, the copper producer, have almost doubled in price over the past year, driven up by rising metal prices and strong output from its open pit-mines in Kazakhstan. But Kaz’s relatively high debt levels of more than $2.2 billion and the risk that the recent rally in copper prices may run out of steam later this year make the outlook for the shares uncertain.
The company was formed in 2014 out of a restructuring of Kazakhmys, which allowed it to focus on its newer open-pit projects, leaving the older, less efficient underground mines with a private company controlled by one of its two main shareholders. Kaz claims that the operating costs of the new open-pit mines are among the lowest in the world, with a cash cost of under 70 cents for every pound of copper produced.
The miner’s new Aktogay and Bozshakol projects are ramping up towards full production and their close proximity to the border with China, a voracious consumer of copper, offers Kaz a convenient export market right on its doorstep. It takes only about two days for consignments to reach the country.
The company, whose shares stood at 916¼p yesterday, up from 461p a year ago, has been enjoying strong cashflow generation and has succeeded in partially repairing its balance sheet after a downturn in the commodity market. Net debt has fallen from $2.7 billion in 2016 but it is still uncomfortably high and with big investments in new projects, there is a long way to go before Kaz will be able to reduce total leverage to more manageable levels. Any drop in copper prices, perhaps in the event of a slowdown in China, would also leave it in a tricky position.
Operationally, the company is doing well. In a production update yesterday, Kaz reported a 29.2 per cent year-on-year rise in copper production to 67,300 metric tonnes. The total was up 3.2 per cent from the previous quarter. Kaz also said that it was on track to achieve its guidance across all metals for this year, targeting up to 300,000 tonnes of copper production and 160 koz to 175 koz of gold. The group, which employs about 13,000 workers, said that the medium-term outlook for prices remained strong. Overall the company is in decent shape.
ADVICE Avoid
WHY There is still a risk of a downturn in the market
