Barclays ends dividend diet ahead of another tough year

Dividends are back - but closing the performance gap between retail and investment banks was too big an ask

Ideally, 2017 would have been the year Barclays closed the performance gap between its solid retail and credit card businesses and flailing investment bank. Almost inevitably, that was too big an ask.

Relief

At least the group drew a line under investors’ other chief bugbear. It restored dividends to above their level at the last full pay-out. With shares at the bottom of the pile among global banks in 2017, reimbursement news has been enough to boost the stock by 5% on Thursday. Revived sentiment could even last a while. Annual profits missed the group’s own consensus forecast but still climbed a creditable 10% to £3.5bn. Plus, most sources of the shortfall were already on the radar – including a £900m charge linked to U.S. tax reform.

Home and Away

But the main performance takeaway is that divergent showings between Barclays' retail and investment banks continued right up to the end of 2017. Profits at consumer-focused Barclays UK inched up 0.5% despite a 2% income fall and additional PPI charges. But Barclays International slumped 22% as income slipped, expenses ticked up and credit impairments jumped 11%. Markets-exposed Corporate and Investment Bank was again the main drag. Tough comparable earnings played a part. But that shows CIB remains too prone to market risks, keeping its place at the centre of gravity for returns. International/CIB shoulder most of the blame for Barclays posting the only negative key return amongst global banks in 2017. Return on Tangible Equity (RoTE) slumped to minus 3.6% from positive 3.6%. Underlying RoTE was 5.6%, but it will be a stretch to hit Barclays’ goal of 9% by 2019 without perfect execution on costs, impairments and a 10% revenue rise after 2017’s 2% fall. A messy 2018 could also make Barclays’s key capital win–CET1 above target at 13.3%– difficult to repeat.

Overhang

Other worries are just as pressing. A hefty penalty is possible from a legacy mortgage case in the U.S. Lack of resolution (and lack of news on Thursday) of the regulatory probe into the CEO’s handling of a whistleblowing matter is another overhang. Elsewhere, there was a possible sign of things to come from an increase in arrears and delinquencies in UK personal loans. Barclays is just as exposed to Britain’s economic risks as its strongest domestic rival Lloyds. The key difference is that stability at the latter is better distributed around the group. Lloyds’ planned dividend growth could therefore look more reliable to many investors.

For Thursday’s relief rally in Barclays’ shares to take root, a favourable reckoning around dividend normalisation is required. If prospects look implausible, the loss of a year and a half of pay-outs will keep Barclays stock under its rivals’ in 2018.

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