Brexit worries have continued to hang over the UK stock market for two years now as uncertainty drowns financial services. Despite these woes, Barclays [BARC] has managed to strengthen its balance sheet over recent years and is now due to generate excess capital, which may lead to a dividend yield of 5% in 2019.
Looking at the bank’s stock since the 2008 financial crash, Barclays never quite reclaimed its former highs. The closest it came to a bounce back was in September 2009 when its share price reached 359.34p, but has since fallen by more than 50%. Despite rallying at the end of December, and again in the first week of January, the stock is down near 25% since the opening day of the markets in 2018.Barclays share price performance, London Stock Exchange interactive chart, as at 7 January 2019
First quarter since restructuring clear of impediments
Barclays reported improved figures for its third quarter earnings with a net income of $19bn, seeing a 6% rise from the same quarter in 2017, and an earnings per share (EPS) of 6.6p, bringing its year-to-date EPS to 21.6p. It paid a dividend of 6.5p for 2018.
Its third quarter marked the first financial period since completing its major restructuring in 2017 that it has started to benefit from a cleaner operating model. The restructuring had begun in March 2016 and was aimed at diversifying Barclays into a transatlantic, consumer and wholesale bank.
Some of its highlights over the three-month period include the company advising on three of the largest M&A transactions in the US, with 40% of its revenue coming out of the States, despite Wall Street’s turmoil. It also gained revenue from equities and fixed income trading which were also up by 35% and 9.7% respectively.
|Net operating income % increase, Q3 YoY||+9%|
|PE Ratio (TTM)||73.54|
Barclays stock vitals, Yahoo finance, as at 7 January 2019
Barclays can survive a disorderly Brexit
Since January 2018, Brexit fears have wiped a reported £50bn from the value of the UK’s top four banks. Barclays, HSBC [HSBC], Lloyds [LLOY] and RBS [RBS] all saw a decline in share price of between 20% and 25% through 2018.
“In spite of macroeconomic uncertainty, and particularly concerns over Brexit which weigh heavily on market sentiment, 2018 is proving to be a year of delivery on our strategy at Barclays,” James Staley, whose been CEO of the bank since 2015, said. “We remain focused on generating improved returns, and on distributing a greater proportion of excess capital to shareholders over time.”
However, according to the European Banking Authority’s round of stress tests that were released in November, Barclays was one of the worst performers in a hypothetical economic crash, with a common equity tier ratio of just 6%. The government agency said the main reason for the declining ratio was because of its large credit card business in the UK and US, as well as its British mortgage and loan book.
“We remain focused on generating improved returns, and on distributing a greater proportion of excess capital to shareholders over time.” - Barclays CEO James Staley
Barclays also came close to failing the Bank of England’s stress test in late November, but it was finally determined that it would be able to withstand a disorderly Brexit if it were to happen. “The core of the UK financial system is ready for Brexit whatever form it takes,” Mark Carney, Bank of England governor, said on the release of the report.
Because Brexit news continues to suffocate the UK’s leading banking institution’s share price, Barclays has begun to bolster its EU operations with a plan to move about 40 investment banking jobs to Frankfurt and strengthen its subsidiary in Dublin.
While investors continue to decrease their UK exposure faster than for Europe, Barclays’ strategists believe that once Brexit is dealt with it will help “remove significant near-term uncertainty for the markets and for the economy, and provide a boost to both UK stocks and the pound”.
A potentially undervalued stock
As one of the largest banks in the world with £2.5tn in total assets, 2018 was a “year of delivery” to put it in Staley’s words.
He attributed the growth to the hiring of more senior investment bankers and increased spending on electronic trading systems. However, its investment bank was still less profitable than its credit card and consumer businesses.
Value of Barclays' total assets
In addition, despite the bank returning to profit and settling most of its misconduct issues, including the concealment of a damning dossier, attempts to unmask a whistleblower and the swift exit of key officials, it’s still struggling to shake off its bad reputation after several years of scandals.
Looking at the stock purely for value in respect to future growth, its five-year expected PEG ratio comes in at 0.32, suggesting that it could be an undervalued stock. Overall, Barclays has managed to generate profit and beat market expectations amid Brexit fears, indicating that it may be trading at a discount if its shares do return to pre-Brexit levels once an exit a deal is decided.