Barclays (LSE: BARC) (NYSE: BCS.US) released its results last week. In short: profits are down, bonuses are up and the dividend is flat. Barclays’ chief executive, Antony Jenkins, is in a bind. He claimed he would clean up the bank’s act after taking over last August after Barclays was rocked by a £290m fine for rigging interest rates.
Has he cleaned things up?
The issue of bonuses is a sticky one for Jenkins, having previously promised restraint on pay. Bonuses increased to £2.4 billion in total — up from £2.2bn a year ago — despite profits falling by nearly a third. For investors, those sums might seem hard to add together.
Pertinently, the dividend remained flat, which led to the Institute of Directors to question who the business is being run for. Is it the bank’s executives? Or its owners? While Jenkins argues that he’s merely paying the market rate to keep the best talent at the bank, it does look outlandish.
As far as shareholders are concerned bonuses are meant to be variable — when the going is good, they go up, while in tough times, they go down. Barclays would argue that it’s in the long term interests of shareholders to offer attractive pay to hold on to top talent.
Adding insult to injury for shareholders is that they were only tapped for £5.8bn through a rights issue in October. Further cost-cutting is necessary to boost capital, with up to 12,000 jobs at risk. Given that there’s an ongoing drive to rebuild the bank’s reputation, this doesn’t do Barclays any favours.
Barclays’ biggest problem
If you’re an investor this is all a smokescreen over a much bigger issue. Late last year Barclays suspended six foreign exchange traders over alleged manipulation of the global currency market. Global foreign exchange markets are worth £3.2tn and the probe into the banks is widening.
These allegations have the potential to be just as bad as the Libor scandal — when £3bn was wiped off Barclays’ value as shares fell 16% — with the investigation set to drag into 2015. The seas look choppy for Barclays and the potential for fines could be enormous.
For an investor you have to assess how much risk you’re willing to take on. Further big fines could yet emerge, while all the losses haven’t yet been absorbed relating to Libor. There’s a reason its share price is cheap, valued at around 9 times earnings, but it’s hard to argue Antony Jenkins isn’t doing well — since he took over, the stock is up 50%.
