When I look at the financial potential of a bank I look for two key things: the competitiveness of its net interest margin; and its dividend policy.
After that, Im really looking at metrics that will confirm my decision. There is the risk, though, of looking too deeply into a banks accounts. Its risky because youll either be overwhelmed by how complicated they are, or deflated by how badly the bank has been behaving.
Take a look at Barclays (LSE: BARC) (NYSE: BCS.US), for example.
Net interest income for the half year increased 10% to 5.9 billion, driven by strong savings and mortgage growth. The banks net interest margin rose 8 basis points to 296 (helped by lower funding costs and lower deposit rates).
In addition, the banks dividend is expected to improve from 0.06 to 0.07, according to City analysts.
So far so good, right? But wait, theres more
According to the banks latest half-year results announcement, profit before tax was down 10% to 3.8 billion. The bank enjoyed better results from its core business (above), but that was more than offset by its poor investment banking performance.
Rough seas in the Markets pulled the investment banking arm down 18%. As a result, income fell by 7% to 12.6 billion.
Once, no doubt, the pride of the bank, its now a thorn in its side.
Barclays the snitch
Its actions last week highlighted that, I think. Barclays became the first bank in the world to reach a settlement with investors over its alleged role in manipulating the London Interbank Offered Rate (LIBOR). The lawyers are hopeful that Barclays will now prove an effective snitch that is, telling on the other 15 banks involved in the scandal (co-operating with the authorities), and enabling out-of-pocket investors to secure bigger settlement agreements down the track with the other banks.
So Barclays has done the smart thing and taken the first-mover advantage in the LIBOR case. It ensures that it suffers minimal further damage to its investment banking business (in terms of this issue).
More mistakes
Recently the bank took yet another step to reduce the size of its investment bank, auctioning its index business (Index Portfolio and Risk Solutions). On the surface it seems like a divestment of an underperforming business, but to rub salt into a wound, a Reuters exclusive showed that some crucial bond pricing data (not actually owned by Barclays) naturally wont be part of the sale package. It turns out the data (which is used to support the pricing of the securities in the indices) is owned by third parties. Its going to hurt the bank because the original price tag was expected to fetch more than 625 million (when it was assumed Barclays owned the data). The finding will make it harder for Barclays to strike a future deal.
The storys getting old
The worlds investment banks froze up in 2008. The long-term economic threats posed by this, and the Great Recession, then forced governments to make taxpayers foot some of the bill. As a way of saying thank you, traders within some of the worlds biggest investment banks (including Barclays) decided to trade illegally. Barclays has now done the smart thing by investors in choosing to fess up first. Its clear though that the strategy is part of a wider move to minimise the damage its investment bank is causing its overall business. This latest news about the miss-pricing of its index business is yet another embarrassing mistake a mistake I suspect management would prefer you didnt know about along with many other aspects of the businesss recent activities.
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David Taylor has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
