By Christopher Thompson
LONDON (Reuters Breakingviews) - Barclays is solving one of its four big problems. Chief Executive Jes Staley said on Thursday he plans to more than double 2018 dividends to 6.5 pence per share – about the level where he cut payouts in 2016. Great – except there are still three other headaches.
One is that the bank’s performance is still not good enough. Admittedly Barclays hit a cost target of 14.2 billion pounds in underlying operating expenses, and a headline minus-3.6 percent return on tangible equity becomes 5.6 percent when misconduct and litigation costs and a revaluation of Barclays’ US tax assets are stripped out. But overall revenues still fell 2 percent year-on-year.
A dodgy top line complicates Staley’s pledge to attain a 9 percent return on tangible equity by 2019. The bank is guiding to 13.8 billion pounds of operating costs by 2019 to do so. Assuming flattish impairments of 2.7 billion pounds and a 30 percent tax rate, it would generate net income of 4.6 billion pounds or around 26 pence per share. Investec analysts reckon Barclays’ tangible equity will be worth 278 pence per share in 2019, meaning a 9.4 percent return on tangible equity. But all this assumes, on a projected cost-to-income ratio of below 60 percent, revenue of at least 23 billion pounds – a 10 percent rise on 2017.
Higher interest rates might help. So would a continuation of rising revenue in the US cards business and the UK retail bank. But it will definitely require better from the misfiring investment bank, which made a pathetic 1.1 percent return on tangible equity thanks largely to a 29 percent year-on-year drop in trading revenue.
The other two problems aren’t even financial. Barclays needs to settle – or win – litigation with US regulators over historic missold mortgage securities without incurring more hefty one-off charges. And it needs Staley to not get ousted by UK authorities investigating his attempts to unmask a whistleblower.
The bank said on Thursday that year-to-date trading income had improved thanks to increased market volatility. But until Barclays’ traders can deliver over a longer period and outstanding legal issues are resolved, the lender’s discount to tangible book value will persist.
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