Barclays Tries to Outrun an Economic Slowdown

(Bloomberg Opinion) -- Barclays Plc Chief Executive Officer Jes Staley clearly thinks his bank's shares are too cheap. But the British lender’s latest results make arguing that case no slam dunk.

Compared with struggling rivals like Deutsche Bank AG, Barclays is clearly doing a better job of generating acceptable shareholder returns. That, and the promise of buybacks, was enough to push Barclays shares up 4 percent in early trading on Thursday. But there are signs of a turn in the economic cycle that should give investors pause.

First, the good news. For the full-year, return on equity – at 8.5 percent, once you strip out litigation and charges – is creeping toward the lender’s goal of 9 percent to 10 percent. Costs as a proportion of income fell to 66 percent, from 68 percent, again provided you strip out one-time legal costs. The promise of more cost cuts and buybacks are a sign of confidence – even if, on an absolute basis, a return on equity of close to 10 percent is hardly something to shout about.

Staley’s overhaul of Barclays is a story of continual cost savings and operational tweaks, rather than the more radical surgery an activist like Edward Bramson might have in mind. The consumer bank’s strong profitability and asset sales helped to cushion the costs of eliminating jobs and businesses in the corporate and investment bank. With the investment bank focused on more lucrative businesses like leveraged loans and a consumer business ramping up lending, in theory, all Barclays had to do was keep a lid on costs and profitability would follow.

But there are signs that the economic cycle is about to put pressure on this strategy. Barclays is trying to defend market share and margins in the U.K. mortgage market, and has ramped up its loan book accordingly since 2017. But impairment charges are rising in Britain: they hit 296 million pounds ($387 million) in the fourth quarter, the highest level in at least two years. At home, Barclays's return on tangible equity was 9.6 percent in the last quarter of 2018, actually lower than in the year-earlier period.

At the investment bank, a long-running drag on the bank's earnings and a key target for Bramson, the story is still one of managed decline. While revenue in fixed income and equities trading certainly held up better than expected, the market’s unit’s quarterly income of 945 million pounds was still the lowest in at least two years. The division's return on tangible equity was slightly less than zero in the fourth quarter.

Staley's offer of buybacks should be set against the threat of Brexit surprises, too. The bank set has aside 150 million pounds to cover the risks, a reasonable cushion, and is preparing for the worst-case outcome. But the impact on U.K. interest rates – and consequently Barclays’s profitability – of a Brexit-induced recession can’t be ignored.

Barclays shares trade at a roughly 50 percent discount to the book value of the bank’s assets – better than Deutsche Bank, which trades at a 75 percent discount, but worse than large French rivals and other turnaround stories like Switzerland's Credit Suisse Group AG.

Staley would argue that the British bank is valued too cheaply. But with Brexit looming and an activist circling, he is walking a fine line between confidence and bravado.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.

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