Barclays shares resilient as dividend freeze avoids cash call

Barclays’ rebounding fortunes have impressed investor perceptions to the extent that it’s even given the benefit of the doubt when it drops fresh negative news.

Cast your mind back a year or so and try to imagine what investor reaction would have been had Barclays announced, as it did with its first-half earnings on Wednesday, that it would set aside an additional £850m for another possible round of damages, and that it was scrapping its dividend target.

The fact that the No.2 UK-focused bank managed to pace expectations helped.

Barclays posted a seven-fold increase in second-quarter net income to £1.15bn, from £161m in Q2 a year before.

That was about 26% higher than the figure the market was expecting, according to Thomson Reuters consensus data.

It was telling that Barclays’ investment bank was the single biggest contributor; though note the driver was a one-off boost of £496m from a legal settlement over assets acquired from Lehman Brothers seven years ago.

Barclays’ plans for its IB have stoked near-controversy with investors.

Largely because many of the division’s assets were moved over to the ‘non-core’ category, making them likelier to be sold.

Interim executive chairman John MacFarlane did not signal any further big changes in strategy for the investment bank, indicating the remainder would remain ‘core’, even if further trimming might be necessary.

Finer details of the bank’s financial performance were also supportive.

• Investment bank Return on Equity +10.2% in H1, vs. +5.7% a year ago streamlining over the last year
• Adjusted pre-tax profit up 12% to £1.85bn vs. average analyst forecast of £1.75bn
• Core capital +11.1% in H1 vs. +10.3% at FY2014—no plans to raise further capital
• Plans to cut costs as percentage of income to “mid 50s”, from 70%; likely to involve cuts to staff numbers and branches: 98 branches closed in year-to-June; 19,000 job cuts planned by end 2016, including 7,000 in IB

In fact, Barclays’ solid financial performance helped lift its stock as much as 3% early in Wednesday’s session.

Keeping income and capital on track appeared to cancel out the potential negative effect of a number of developments that might have unsettled investors not so long ago.

Chief among these was that the bank announced it would be scrapping its former policy of continuing to grow the dividend, opting instead to keep the annual pay-out at 6.5p per share, the same as in 2014.

The implication of this should not be lost given that McFarlane specifically noted that freezing the dividend would help build capital, having ruled out ‘raising capital’ on the market.

Barclays also revealed it had set aside another £850m to compensate UK customers, including £600m for customers mis-sold payment protection insurance products, which has now cost the bank £6bn.

But combined with the more assertive tone of the current boss, who had jettisoned the former CEO, Antony Jenkins earlier this month for not making required changes fast enough, many investors signalled this morning they would stay on board.

“We need to accelerate the execution of the strategy,” McFarlane said, pinpointing a need to speed up the growth in earnings, return on equity and capital generation, as well as cut out bureaucracy.

“Barclays … remains far too hierarchical, bureaucratic and group-centric to deliver the required outcomes. I therefore want to see much more streamlined processes,” he said.

The investor support seems to be quite clear and unequivocal at the moment, with BARC shares remaining resilient and supported by an uptrend that has been intact since October 2014.

For proven daily resistance above current levels, we have to scan the chart back to 305p-312p.

That range knocked the stock back in February and May 2013 respectively.

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