I received a note from a broker last week following a call between John Cryan, co-chief executive of Deutsche Bank, and analysts, which read: “The new CEO (of Deutsche Bank) was bullish and categoric and specific on capital. (There are) no plans to raise (equity capital) unless there are external events – larger than expected litigation.“
Analysts tend to monitor closely the relative performances of Deutsche Bank and Barclays (LSE: BARC) — in fact, their fortunes are similarly tied, as their recent trading updates show. My quick take? Their shares are expensive, based on growth projections and their price to tangible book value ratios.
That said, Mr Cryan’s remarks are very important: a huge rights issue could materialise only under extreme circumstances — and this is great news for Barclays, too, as it confirms that a large cash call should be ruled out at present.
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How about other risks, though?
Provisions & Litigation
In its interim results published last week, Barclays reported “credit impairment charges and other provisions” at £496m in 2Q15, up 4% from £477m in the 1Q15.
These items currently hover below £500m on a quarterly basis, yet they were well above £500m in each quarter of 2014 and in excess £1.4bn in the second half of 2013, or about £720m quarterly for that year.
Most of Barclays’s core and non-core operations are faring better on this front, while another problematic line of the income statement, “litigation and conduct” expenses — which also have to be deducted from the total income of the bank — also showed encouraging trends.
Litigation and conduct stood at £77m in the second quarter, up 50% from £51m in 1Q15, but they were well below the average for the last eight quarters.
Only A One-Off?
As a one-off, however, Barclays reported £850m of non-recurring provisions for UK customer redress, which were based on an updated estimate of future charges and associated costs. This is cash that must be set aside for the bank’s bad behaviour with regard to payment protection insurance.
What concerns me is that these provisions came in only £50m below £900m of non-recurring provisions that Barclays recorded in 2Q14 — that’s the highest level of additional, non-recurring provisions during the 2Q15-3Q13 period.
Consider that the aggregate value of provisions over the last eight quarters stands just above £2bn, and has been rising since 4Q14, when they stood at £200m. Now, this quarterly amount is surely manageable, and even more such provisions combined with mildly higher litigation costs, won’t kill the investment case.
So, I am happy to up my personal price target for BARC to 230p a share from 220p, but I invite you to consider that:
- Its current share price of 280p is very close to its 52-week high of 289.9p, inspite of a low growth rate and a cost-income ratio that is several percentage points above the stated target (“mid 50s“).
- Barclays does not make its cost of equity (“group return on equity is 5.9% on a statutory basis, well short of our cost of equity“), which is rarely a good sign for value hunters.
