The market has given a mixed response to banks half-year results this week. Virgin Money was applauded with an 8.7% rise on Tuesday. Fellow UK challenger banks Metro and Shawbrook had their shares pushed up 7.8% and 5.1%, respectively on Wednesday, while international playerSantander gained a more modest 2.5% on the same day. Then, yesterday, Lloyds was given a big thumbs down, its shares tumbling 5.8%.
Barclays (LSE: BARC) stepped up to the plate this morning, and the market likes what it sees, driving the shares upover 9% by mid-morning.
Core and non-core
Group pre-tax profit for the first half of the year fell 21% to 2.06bn from 2.6bn. Performance was held back by the Non-Core unit, the run-down of which has been accelerated since the arrival of chief executive Jes Staley in December. So, while pre-tax profit in the Core business advanced 19% to 3.97bn from 3.35bn, Non-Core losses widened to 1.9bn from 0.75bn.
Core return on tangible equity (RoTE) was a healthy 12.5%, with Barclays UK delivering 19.4% and Corporate & International 10.7%. Group RoTE was dragged down to 4.8% by Non-Core.
As Staley said, the Core performance demonstrates the already high quality franchises at the centre of the future of this Group. Non-Core rundown the key to unlocking the full earnings power of that Core has good momentum, and we remain committed to closing the unit in 2017.He added that he sees no reason to adjust [the banks strategy], or the pace of delivery, in light of the vote by the UK last month to exit the EU.
Improving outlook
I believe the outlook for Barclays is improving under the new chief executive. Taking the short-term pain of the accelerated run-down of Non-Core is a no-nonsense move that bodes well for the longer-term future. Fines and compensation for past misconduct have also yet to work through for example, the bank announced a further 400m provision for Payment Protection Insurance redress but again this should now be a relatively short-term drag.
Staley has made some bold decisions during his short time at the helm, and some unpopular ones notably slashing the dividend in half earlier this year but I see a man intent on getting Barclays back to full health in the shortest time possible. There were plenty of encouraging indicators in todays results, including the common equity tier 1 ratio a little ahead of consensus expectations at 11.6% and the cost-to-income ratio in the Core business improving to 58% from 65%.
The chief executive has shown his confidence in his own abilities and in the future of Barclays by making multi-million-pound share purchases since joining and at higher prices than todays 155p. I share his confidence, and reckon market sentiment is set to turn.
Take off
Barclays shares are at a depressed level and valuation, providing a low base from which to take off. Improving performance and sentiment could lead to a significant rerating in the next few years.
As things stand, the shares are trading at a huge 46% discount to the tangible net asset value of 289p announced today. A forward P/E of 16 may not appear cheap, but Barclays could rapidly grow into that rating. Similarly, a current prospective dividend yield of 1.9% has potential to rise strongly further down the line. As such, I rate the shares a buy.
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G A Chester 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.
