At first glance, Barclays (LSE: BARC) looks to be a great investment. The company currently trades at an attractive forward P/E of 11.6. Earnings per share are set to expand 34% this year and 23% during 2016.
Analysts believe that the group will offer shareholders a yield of 3% during 2015.
However, at present these forecasts are just, well, forecasts and there are three key factors that could prevent Barclays from meeting analysts targets during the next few years.
Ringfence costs
One of the biggest threats facing all international banks currently based in the UK are the ringfencing rules that are set to come into force before 2020.
Under these rules, banks like Barclays are required to separate their retail and investment banking arms in an attempt to shield retail customers from losses at the investment bank.
The new, separate retail divisions are required to be separate legal entities, with new management teams and computer systems, which will prove to be a costly process.
Indeed, it is estimated that the ringfencing process will cost banks billions every year to implement. What’s more, UK banks that have been forced to separate retail and investment arms will struggle to compete with international peers that can offer a range of products from the retail and investment bank side.
With the ringfences in place, UK banks will be unable to cross-sell products from the retail and institutional arms of their businesses.
Legal costs
Spiralling legal costs are another factor that’ll hold Barclays back during the next few years.
After being ordered to pay a settlement of £1.5bn after the bank was found guilty of manipulating the foreign exchange markets earlier this year, some analysts have suggest that Barclays is facing another $1bn in fines related to the recent foreign exchange market manipulation case.
Unfortunately, this is just the tip of the iceberg. One set of analysts has estimated that Barclays could be facing an additional £3bn of conduct costs overall during the next two years.
These costs are connected to everything from market manipulation to mis-sold PPI and general legal fees.
Winding down
The third and final factor that will hampered Barclays’ growth during the next few years is the bank’s decision to wind-down its investment bank.
Barclays’ investment bank used to be the group’s profit centre. After acquiring the assets of the failed Lehman Brothers estate, Barclays’ investment bank was, at one point, responsible for 85% of group profits.
However, last year after a number of scandals, the investment bank’s return on equity — a key measure of bank profitability — slumped to 2.7% from a level in the low teens.
As a result, Barclays has embarked on an aggressive cost-cutting program. 7,000 jobs were cut at the investment bank last year, but this has only impacted performance.
Some senior managers have been forced out, and employees have described the investment bank as a revolving door. Workers often leave the bank soon after they’ve been employed.
