The Barclays (LSE: BARC) Q3 results were described as “particularly significant” by CEO Jes Staley because they represent the first period since the company completed a disruptive restructuring programme that included closing its Non-Core unit and the disposal of Barclays Africa.
The strategy has been simple – sell off these underperforming assets so that the company’s stronger divisions, including the UK retail bank and its Consumer, Cards and Payments division, could shine.
The transition has been painful for shareholders. The shares are down 26% in two years and the dividend was cut in half last year. Now that the CEO describes the business as “the bank we want to be,” the pressure is on to meet its goals to deliver a 10% return on tangible equity (ROTE) by 2020.
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A better Barclays?
Anyone buying Barclays shares over the last few years has had both eyes firmly on the future, so the big question remains: will the restructured Barclays see significantly improved performance now it has emerged from this turbulent period?
After the disposal of its African business, the company’s CET1 stands at 13.1%, which is pretty much bang on its targeted long-term capitalisation level. So far so good.
Barclays UK and Barclays International delivered ROTE of 9.4% and 10% respectively in the quarter, but the group total came in at a sub-par 7.1%, a decline from the first half’s 8% figure. This figure excludes the loss on the sale of Barclay’s Africa Group, charges for PPI and impairment charges but these seem fair and consistent adjustments that help us understand how the ongoing operation is truly functioning.
Profit from continuing operations was up a solid 26% this quarter, although this was driven by a significant reduction in operating costs rather than top-line growth and was held back by a poor showing from the Corporate & Investment Bank, with income falling 5%, driven largely by a 14% fall in income from the markets division.
Perhaps we shouldn’t be too harsh on the Investment Bank given its recent resurgence despite the difficult macro environment, yet there’s no denying quarters like this are bad news for Staley’s long-term strategy, which depends on a large improvement in the division’s performance.
Fears baked into the price
Net tangible asset value per share as of 30 August was 281p, compared to a share price of only 184p today. That’s a strikingly cheap valuation, but there is significant uncertainty hanging over the bank including claims that Staley attempted to track down a whistleblower, a pension deficit and various troubling macro factors including Brexit.
In all, I’m not certain that Barclays is going to be a wonderful long-term investment but I do believe it is likely looking too cheap right now. The dividend yield is a poor 1.6% but an investment in it should surely be based on the 35% discount to net tangible assets.
It certainly has the value investor in me excited but I’m not sold on the strategy to beef up the investment bank, nor am I an expert in the banking sector. Despite that, I’m still tempted to buy a small speculative position in the company and believe Barclays could make an excellent investment for the more risk-hungry Fools out there.
