Investors lose patience in Barclays

Investors have become impatient with Barclays and its chief, Jes Staley, and today it looks like some have lost patience completely. This was a first quarter not in flux but it wasn’t the best overall. Nevertheless once the bank can focus on doing the basics right and shakes off legacy issues like misconduct charges and PPI claims, it might yet achieve its admittedly ambitious target of Group Return on Tangible Equity (RoTE) of greater than 9% in 2019. Investors disagree – shares are off more than 7% this morning to hit their weakest in a year.

Profits before tax in the quarter came in at £1.1bn, short of the £1.4bn consensus expectations. Attributable profits for Q3 rose to £583m thanks in no small measure to a fall in new provisions for PPI.

Like Lloyds, Barclays had no need to find cash for PPI claims in Q3. PPI charges of £700m this year, all booked in the first half, are lower than last year, but there could yet be more to come following launch of FCA ad campaign and an uptick in claims logged before this went live. There is also a lot of investigations and litigation issues hanging around – we’re probably not seen the back of misconduct charges. Staley himself faces investigation over whistleblowing.

UK RoTE rose to 9.4%, while International declined to 10%. When you strip out the hit from the sale of the Africa business and PPI, group RoTE was 7.1%, some way short of the 2019 target of 9%. This is the key number that investors care about. If Staley can’t make progress soon he might not last.

Trading income fell c25% to under £1bn for the first time since Q4 2015 amid a lack of volume and volatility in fixed income, currencies and commodities. Slacker profit  in the corporate & investment banking segment was to be expected given the market conditions, but the decline from £885m in Q316 to £593m in Q317 looks a bit worse than anticipated. This meant Barclays International profits declined to £652m from more than £1bn a year before. 

In the UK business, net interest income was flat at £1.5bn but net interest margin declined to 3.28% from 3.72% a year before and 3.7% in the preceding quarter. CET1 ratio steady 13.1% is on target having risen from 12.4% at the end of 2016. However the amount of CET1 capital decreased to £42.3bn from £45.2bn over that period.

Debenhams: redesigned for mobile

“Debenhams would appear to embody many of the struggles facing the high street. Shoppers are going online; the weak pound is pushing up input costs, hitting margins; and labour costs are rising. The answer for Debenhams at least is to get its mobile shopping experience better than anyone else. With sales growth of 57% in this segment it looks like it’s on the right track.

Like-for-like sales were up 2.1%, but flat in the UK. Partly this is a reflection of shoppers switching to online – digital sales rose 12.7%, with UK mobile orders a particularly strong at +57%. Investment here is crucial and does seem to be paying off. The upgrade could support further mobile sales growth. Clothing was weak, but beauty and food improved – reflective of wider trends. Group gross margin rate declined 30 bps as input cost inflation and higher employment costs bit.

CEO Sergio Bucher (ex-Amazon) is upbeat about the transformation progress – Debenhams Redesigned - and this may offer some succour to investors as they digest a pretty bad fall in profits. 

Management remains confident in the strategy and this means it can pay a final dividend of 2.4p per share, making a total dividend of 3.425p.

Investment in the new strategy is vital but means a bit more pain for investors for the time being. The £36.2m one-off charge left reported pre-tax profits -44% at £59m. Underlying profits were still down a lot, -16.6% to £95.2m, but in line with market expectations. UK EBITDA was a weak spot, falling more than 10% due to a ‘tough trading background’ in the second half.

DEB shares opened lower on the profit drop but the upbeat outlook has cut through and the stock is now +2% at 47p. Another strong Christmas is required. With M&S losing its clothing and beauty boss just before this critical time, Debenhams may benefit.

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