Barclays must go further back to the future

Double-digit core returns at Barclays in the first half were a welcome sight

Welcome to “the future”

Double-digit core returns at Barclays in the first half are a welcome sight and shutting the door on the non-core rundown to the extent that CEO Jes Staley could state “we’re done with restructuring” rubber stamps reassuring progress. Perhaps Staley edges a toe into the realms of hyperbole in going on to say that Barclays is now “the bank that we want to be in the future”. The £1.2bn loss in H1 is indeed now a thing of the past, as is the additional £1.1bn impairment from the BAGL sale. There’s no question either that the BAGL exit has progressed satisfactorily—even a touch faster than expected considering ongoing economic and political uncertainty in South Africa. On the other hand, Barclays’ flagging of an 18-month window for regulatory deconsolidation opens the door to further impairments, albeit a rise of ~26 basis points in the regulatory capital buffer that the group forecasts during that time and lack of Common Equity Tier 1 impact in H1 are an offsetting positive.

The search for significance

Whilst well below HSBC’s likely full-year ratio of slightly more than 14%, Barclays’, foreseen at c.13.4%, implies ample progress in the group’s ability to enhance attributable returns –eventually. Especially if we remember that Barclays’ ratio was at 11.4% around a year ago. Group return on tangible equity (RoTE) at 8.1% by the half year is, as Staley himself admits in his video, not where the group wants to be—preferably above 10%. All told, the impression is that the goal won’t be hit in the current calendar year, thereby pushing the date Barclays may signal a significant rise into 2019. Official guidance for payment of a “significant proportion” of earnings remains “over time”. Return on tangible shareholder equity stood still at 3.8% in the half. Or, it actually retreated 200 basis points to 1.8%, including BAGL impact. And half-year adjusted profit missed expectations.

Welcome progress overall, but movement back to satisfactory sustainable growth and returns was still glacial in H1, underperforming key UK, European and U.S. rivals.

Barclays’ shares fell almost 4% on Friday in reaction to its quarterly and half-year figures – including a fall off an earlier rise of as much as 2.5% to trade 1.3% lower on the day.

  • The decline nudged the stock back under the tightening range between a declining trend line and the rising line—the latter confirmed by persistent tags; in August and October 2016, and last month
  • It’s worth pointing out these markers because the price spent rather a long time levitating way above the rising trend between August 2016 and June this year, though it duly tested just a small distance beneath before bouncing
  • That brings us to the most intriguing aspect of the overall picture over about a year, though the gently rising wedge is also indicative, with a bearish bias, suggesting the year-long uplift may be in jeopardy
  • Combined with the main feature—a rounded top pattern—the probability of some sort of denouement rises.
  • Clearly buyers must pay close attention to how price behaves close to the rising trend line, at the time of a definitive break out, which is not quite yet
  • Support is not out of the question below the trend at this year’s low in June, 194.4p, not too far from a virtual gap/resistance-turned-support back in November
  • Below that, obviously things would be more painful for buyers. Clear consolidation in August-November would be their best hope
  • A ‘false alarm’ can be declared if the rising trend holds, with a first upside target of this summer’s highs around 213p

Source: Thomson Reuters and City Index

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