Bad timing
Welcome as they are, Barclays’ more clearly defined financial performance goals and timelines have provided an easier target for sceptics on the group’s strategy. Timing is also less than fortuitous. Investors will recognise that Q3 was the most inchoate quarter in a transitional year. However Barclays’ stock was already amongst the most disappointing among European banks before Thursday’s third quarter release, so an extended horizon towards guaranteed targets—which are actually quite modest—has turned investor disappointment up several notches.
UK in flux
The impression that this newly calibrated Barclays (LON:BARC) has yet to get into gear also helps account for a sizeable share price ‘gap’ in early Thursday trading, with sellers having to accept prices some 2.5% lower than Wednesday’s close in order to get shot of their stock. Chiefly, the key measure of a bank’s ability to generate profits for shareholders, return on tangible equity (RoTE) at Barclays UK of 20.4% in the first half, now looks increasingly unsustainable. 9-month return on average allocated equity was less than half at 9.4%. Note Barclays UK achieved 21.1% in Q3 2016.
UK returns can edge higher as impairments and costs moderate further, after their decline helped drive an annual rise over 9-months. With net interest income growth glacial across the sector and the impairment outlook difficult to predict though, we continue to see Barclays’ domestic business as a work in progress and early promise staying difficult to match in the medium term. In fact, Barclays’ basic profitability retreated across the board in Q3. Leaving out hits from like the loss on the sale of the Barclays Africa stake and another PPI charge, the group tally was 7.1% in the quarter against 8.1% at H1 and International was down 2.9 percentage points to 10%. This completes the picture of a group that will continue to lag rivals for some time.
What is “reasonable”?
Barclays now seems to agree. New targets announced on Thursday extend the horizon and lower the hurdle to faster growth. The 10% RoTE generally regarded as minimum for underlying profitability is now not forecast before 2020. The “reasonable timeframe” over which Barclays said it expected group and core returns to converge when announcing Q3 results last year will have been stretched from the perspective of many investors. At the time, the core had just hit 10.4%. Targets also exclude further litigation and conduct expenses, many of which remain in the pipeline. We think it was no surprise that Barclays’ shares were on track for their worst day since June 2016 at the time of writing. The group will update policy over how and when it will “distribute the returns” with full year results early next year. Shareholders do not seem optimistic that there will be many returns to disburse any time soon.
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