Barclays raises 2018 dividend guidance

Full-year dividend back to 6.5p next year and talk of buybacks should have investors purring with delight even though a series of one-off charges meant Barclays slid to a loss in 2017.

Group profit before tax and exceptional charges increased 10% to £3.541bn, boosted by a 5% drop in operating expenses and positive jaws, although revenues fell by 2%.

On an attributable basis, Barclays swung from a profit of £1.6bn in 2016 to a loss of £1.9bn in 2017, down largely to some big one-off costs including a £2.5bn loss on the sale of its African business and a £0.9bn hit taken due to US tax changes.

While the US tax DTA charge dragged the bank into a £1bn loss in the fourth quarter from a profit of £380m a year before, the changes to the tax code will result in a reduction of the group's effective tax rate in 2018 and future periods to the mid-20% area.

Legacy issues remain: Litigation and misconduct charges cost £1.2bn last year. Jes Staley’s future remains a doubt – the FCA investigation over the whistleblowing case is due soon. Meanwhile a far more serious threat looms in the shape of the SFO’s investigation into Barclays’ 2008 emergency fundraising. Worst case scenario – Barclays is stripped of its banking licences. Clearly management and investors are pretty relaxed that it won’t go that far, but there is no room for complacency.

In the UK, Barclays is growing the mortgage portfolio and enjoying lower impairment charges. Total credit impairment charges and other provisions were 13% lower, more than offsetting the 2% decline in income. PPI provisions for the year were £300m lower than 2016. Barclays UK profit before tax increased to £1.747bn from £1.738bn.

Trading revenues suffered a poor Q4 like all the big banks, and indeed it looks as though Barclays did a bit better than its US peers. As a result, Barclays International profit before tax declined by around a quarter to £3.275bn from £4.211bn in 2016. More normal volatility levels in markets and rising interest rates ought to help boost earnings going forward.

Good progress on capital generation is in evidence. CET1 ratio increased to 13.3% from 12.4% a year ago as Barclays offload more risk weighted assets. This is above its own target of 13%.

Group return on tangible equity before the big one-off items was 5.6%, which means there is a bit of ground to make up if the bank is to achieve its target of 9% in 2019 and greater than 10% in 2020 (ex-litigation and conduct charges).”

Centrica shares up as cost-cutting measures accelerated

When Ian Conn is using phrases like ‘material uncertainty’, you have to worry, even if Centrica met its revised financial targets for the year. Earnings per share were down 25% to 12.6p – a shade above the 12.5p guided back in November when management issued a profits warning.

Indeed while this mea culpa from Conn looks bad, it was all fairly well guided in November, hence why the shares are responding positively this morning to news that Centrica plans to ramp up its cost-savings programme. The other boost comes from a dividend of 12p that investors had feared might be cut following that November warning.

The problems at its business supply division – particularly in the US – continue to eat into profits, while political and regulatory uncertainty continues to affect the UK residential energy supply market.

Adjusted operating profit was down 17% to £1.252bn, largely down to a big decline in earnings and margins in Business. Consumer adjusted operating profit of £890m was down 1% year-on-year, while Business operating profit was down by 67% to £161m. Pretty much everything is being blamed for the hit to Business profits from the impact of high electricity cost volatility in the UK to low gas price volatility in North America. As in consumer, there is also significant competition in the sector.

Although less of an impact on profits this year, arguably the real worry for Centrica lies at its core – the business continues to lose customers in the UK domestic market.

Total energy customer accounts fell by 1,376,000, or 10%, last year. Management has to find a way to staunch the flow of losses, which seems to be getting worse, not better. As noted in November in the four months between the end of June to the end of October, Centrica lost 823,000 UK energy supply accounts. Competition is fierce as smaller players take on the big six.

There has been good progress on cost savings and solid plans to accelerate this process. Having hit the £750m target three years early, management is now targeting a further £500m in savings, taking he programme to £1.25bn per annum by 2020. Also good progress on debt - net debt of £2.6bn is towards the lower end of the £2.5bn-£3bn targeted range and was down £877m from a year before.

Extra focus on financial discipline is of course welcome but the question is whether Conn and co have more in mind to fix Centrica than just wielding an axe to costs. Despite today’s small uplift, shares are down two-thirds from the September 2013 peak and are now trading where they were in 1999. Not a great performance by any stretch and it will take more than just slicing costs here and there to fix it.

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