As ever for the chief executive of a big bank, it is a case of one step forward and then at least one back. So it is for Jes Staley at Barclays.
He pulled off a significant feat over the Easter weekend by setting up Barclays’ new ringfenced bank for 24 million retail and small business customers with £250 million of assets.
That made Barclays the first bank to comply with rules that become law next year which are intended to protect high street operations from failure.
Not only was there a benefit in getting the job done, Mr Staley’s policy was also designed to put Barclays onto a better footing with regulators. However, Moody’s came along and slightly spoilt the celebration by cutting the bank’s debt rating to one level above junk and flagging the likelihood of more swings in the earnings of its
non-ringfenced investment bank.
The downgrade is not the end of the world. The credit ratings of most banks going through ringfencing may come under pressure because they will have to fund both parts separately. The issue is bigger for Barclays as funding its investment bank, whose £900 billion of assets will go into the non-ringfenced part, will be a bigger task than for others.
Another positive development for Barclays has been its settlement with the US Department of Justice over mis-selling toxic mortgage bonds in the run-up to the financial crisis. The bank struck the deal last week at $2 billion, less than half the amount the American authorities had sought.
Removing that uncertainty leaves only one big regulatory issue, but it is a big one. Next Tuesday marks the one-year anniversary of the bank’s announcement that Mr Staley was being investigated over his attempt to unmask a whistleblower. Not knowing for a year, and probably longer, whether the boss will stay or go is an extraordinary situation for shareholders to be in, and is weighing on the bank’s share price.
And then there is Edward Bramson. The activist investor has taken a 5 per cent stake in Barclays, making his vehicle, Sherborne, one of the five biggest shareholders in the lender. It is unclear what Mr Bramson wants from Barclays — his previous playbooks have included restructuring — but it is obvious that he thinks the bank is undervalued. There are many in the City who agree. But there is little consensus about whether Mr Staley’s plan is the right one to improve returns and eventually drive up the share price.
Mr Staley has set about focusing Barclays on the UK and US, and put forward a defence of being a universal bank on the grounds that investment and retail banking balance each other in terms of profits and risk. The problem areas are costs and capital allocation in the investment bank.
As analysts at Jefferies noted in the fourth quarter of last year, the investment bank generated 44 per cent of the group’s revenue and 59 per cent of operating costs. But investment in the division appears to be paying off: its performance towards the end of the year was relatively strong and Mr Staley says it had a good start to 2018. Stripping out litigation costs, the bank delivered a return on tangible equity of 5.6 per cent in 2017. The lender is promising a trajectory towards 10 per cent by 2020.
Barclays pledged to more than double its dividend to 6.5p for 2018 and is signalling that more cash will start to be returned to shareholders. That may not be for a while, but it is on the agenda now that Barclays has settled with the US authorities and almost completed its restructuring
The shares have been drifting up in the past couple of months but still trade at about 0.8 times tangible net asset value. That looks good value for a bank where the news is likely to be good over the next few months.
ADVICE Buy
WHY Barclays has built its capital to a strong 13 per cent with further accruals set to be returned to shareholders
Electrocomponents
The Electrocomponents’ turnaround has left investors pausing for breath in recent months, but the shares were given impetus yesterday when the FTSE 250 electronics distributor raised full-year profit forecasts.
In a fourth quarter trading update, before its annual results next month, it said revenue growth had remained strong and gross margins were better than expected, prompting it to raise adjusted pre-tax profit forecasts “slightly” ahead of the top end of the market’s consensus range of between £171 million and £161.8 million for the year to the end of March. This was well received, with one broker calling it a “confident statement”, pushing shares up 3.4 per cent to 598¼p yesterday.
They have come a long way under Lindsley Ruth, the chief executive leading the revival, from a low of 172½p in September 2015, shortly before the American outlined his turnaround strategy, but had pulled back in recent months from last November’s peak of 709p.
Electrocomponents, which trades under the brands Allied Electronics & Automation and RS Components, stocks more than 500,000 electronics and industrial products, billing itself as a “one-stop source for everything engineers need”. It works with about 2,500 suppliers and operates in 32 markets.
Mr Ruth has been slashing costs, improving service and customer relationships and turning around its business in Asia. It has finished the first phase of its plan, finding annual savings of £30 million, and there will be an update on the next leg of the shake-up at the full year results.
Like-for-like revenue rose 10 per cent in its fourth quarter, leaving it up 13 per cent for the year.
Although the low hanging fruit has largely been picked, the outlook is positive and the US-China trade war is unlikely to “immediately” affect it, with it saying most US products are from domestic suppliers, according to analysts at Jefferies.
The decent revenue growth and better margins have underpinned strong cashflows, raising hopes of a dividend rise, which is more than two times covered, the highest in 15 years, according to Quest, part of Canaccord Genuity. There is also scope for mergers and acquisitions.
ADVICE Buy
WHY Prospect of bigger returns or M&A, and shares have pulled back from peak
