Eight years on from the Financial Crisis shares of Barclays (LSE: BARC) still trade at a fraction of their pre-crisis peak. Many in the City certainly appear convinced that the banking behemoth’s best days are behind it, so is it time for investors to throw in the towel?
The banking industry has always been cyclical, but at least shareholders could traditionally comfort themselves with high dividends. However, shareholders of Barclays will find no respite in dividend income as new CEO Jes Staley promptly cut these payouts by 50% in his first quarter at the helm.
Without great dividends to look forward to, can shareholders at least expect share prices to grow at a steady clip over the next few years? I remain doubtful. Although selling off African operations will net several billion pounds, if suitable buyers can be lined up, Barclays will still encounter the same headwinds it has faced since the Financial Crisis.
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Capital requirements continue to increase, regulatory fines topped £4bn in 2015 alone, and the company’s massive investment bank continues to underperform. The investment bank’s return on average equity (RoE) for 2015 was a miserly 5.6%, compared to 8.7% for the African operations that management is selling off, a full 17.7% for the Barclaycard division and 12.1% for UK retail banking.
As we see, while Barclay’s domestic-oriented credit card and retail banking operations have profited from a strengthening UK economy, these earnings haven’t flown back to shareholders. And, if shareholders aren’t benefitting during the good times, I see little reason to invest for the long term in a bank that has failed to cut poorly-performing divisions, has high costs and offers little possibility of top-line growth.
More pain to come
The most recent annual loss can largely be chalked up to a further £3.5bn in fines related to PPI claims and US mortgage-backed securities, among others. Unfortunately, looking past these payouts and the remnants of the struggling, soon-to-be-axed investment bank, RBS’s underlying go-forward business isn’t that strong either. UK retail banking operations’ RoE was 11.4% in 2015, down from 13.7% in 2014 and well below the level of competitors such as Barclays or Lloyds.
The biggest problem for RBS has been its continued struggles with high operating costs. The bank’s cost-to-income ratio, which measures how much it costs to bring in each pound of revenue, was 80% for the retail bank, and a full 127% for the group as a whole. Achieving the bank’s long-term target of a 50% cost-to-income ratio will require many more years of cost-cutting and downsizing. Given the fact that the bank is in worse shape than competitors and still faces a long, uphill slog to merely return to profitability, I foresee nothing but continued stagnation for RBS share prices.
Shareholders of Royal Bank of Scotland (LSE: RBS) can’t be much happier than Barclay’s investors. The struggling Scottish bank recently posted its eighth consecutive net annual loss, which sent share prices down to a mere £2.23 a share.