Are The Bulls Or The Bears Right About Barclays PLC?
Banking goliath Barclays(LSE: BARC) has leapt to levels not visited since early March in Wednesday trading, the stock benefitting from the fizzy investor appetite washing across financial markets.
But are investors throwing fresh money away by ploughing back into the bank?
Barclays' decision to cut the dividend to 3p per share through to the close of 2017 -- a huge reduction from last year's 6.5p reward -- underlined the balance sheet struggles brought about by hulking regulatory fines.
The business was forced to stash away a further £2.2bn in 2015 to cover the cost of mis-selling PPI alone, up from £1.27bn in the prior year. And more than half of last year's costs were accrued during the fourth quarter alone, illustrating that Barclays expects a deluge of claims before a possible 2018 deadline kicks in.
Looking elsewhere, many industry commentators have voiced concerns over Barclays' decision to sell its holdings in Barclays Africa Group, a move that seriously undermines the firm's exposure to lucrative emerging markets.
But in the nearer-term Barclays' fears fall a little closer to home. The possibility that Britain could tumble out of the European Union in June is casting a huge pall over the bank's revenues outlook, as are signs that the UK economic recovery is running out of steam -- the IMF yesterday cut its growth forecast for 2016 to 1.9%, down from January's estimate of 2.2%.
Leaner and meaner?
Still, I reckon there is plenty for investors to get excited about. In the long-term I am confident that the stable British economy should deliver great returns at Barclays, while the firm's vast exposure to North America provides the bank with exceptional opportunities on foreign shores.
While plans to kick-start Barclays' Investment Bank have divided shareholders, the division undoubtedly provides the potential for spectacular earnings growth in the years ahead. Meanwhile, planned office closures across Asia suggests that chief executive Jes Staley is keen to keep a tighter leash on costs at the Investment Bank than was exhibited in previous years.
Speaking of which, Barclays' extensive 'Transform' cost-cutting programme has worked wonders in terms of creating a much leaner, profits-generating machine. The company's cost:income ratio slipped to 69% last year, and Barclays plans to drive this below 60% further down the line.
What's the verdict?
So while Barclays may still have plenty of questions to answer, I remain confident the firm has what it takes to navigate these travails and provide resplendent investor returns in the coming years.
This view is shared by the City's army of brokers, who expect Barclays to bounce from an anticipated 4% earnings slide in 2016 to record a 41% advance next year. Consequently Barclays' ultra-cheap P/E rating of 10.4 times for the current period slips to a lip-smacking 7.4 times for 2017.
And while Barclays' 1.8% dividend yield for this year may lag the FTSE 100's average yield of 3.5% by some distance, I fully expect payouts to march higher beyond 2017 as capital-building concludes and earnings explode.
Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.