Here’s Why Barclays Has Drawn the Ire of Investors

Source: http://www.flickr.com/photos/alwyn_ladell/

Source: http://www.flickr.com/photos/alwyn_ladell/

Barclays (NYSE:BCS) — like many other large banks — still bears the scars of the financial crisis; litigation and regulatory charge are ongoing, with the company announcing ahead of its release of fourth-quarter earnings 330 million pounds, or $541.89 million, in litigation costs and charges for the three-month period. It’s Chief Executive Officer Antony Jenkins — who has pushed to implement a “fundamentally different culture” than that created by his predecessor Bob Diamond — has downsized the size, structure, and workforce of the second largest bank by assets in the United Kingdom in an effort to rid its balance sheet of capital-hungry loan portfolios and limit derivatives and securities lending so as to be compliant with the global banking rules known as Basel III. In particular, alongside earnings, the bank announced plans to cut as many as 12,000 jobs, or about 8 percent of its staff, as part of the restructuring that began a year ago.

Upon taking office in August 2012 — amid the fallout that followed the bank’s Libor-rigging scandal — Jenkins committed to rebuilding investor and customer trust in the institution, a task he believes could take as many as ten years. Libor rigging cost Barclay’s former chief executive and chair their jobs, giving both investors and customers a reason to be concerned about its business culture. “It is about what you do, not what you say,” Jenkins told BBC’s Today radio program in December. “Until people start to perceive the change, Barclays will not begin rebuilding that trust.” He acknowledged that, “It’s desperately disappointing to still have these issues being uncovered,” but with Sunday’s news that massive amounts of customer data was stolen to be sold on to brokers, it will be hard for Jenkins to sell the idea that a fundamental change in corporate accountability has begun.

It was also not the best quarter for Barclays financially; investors were clued into that reality just a day before earnings were released. On Monday, the bank pre-announced its headline figures, and in line with that preview, the bank reported Tuesday that underlying pretax profit would total 5.2 billion pounds, or $8.52 billion, a figure lower than the 5.4 billion pounds expected by analysts and a 26 decrease from the 7 billion pounds earned in 2012. The problem is that costs have soared as Barclays has worked to reshape itself into a smaller, more competent bank. Still, net income rose to 540 million pounds, or $886.73 million, a massive recovery from the loss of 624 million pounds, or $1.02 billion, reported in the year-ago quarter. But adjusted return on average shareholders’ equity, a measure of profitability, did fall to 4.5 percent from 9 percent in the year-ago quarter.

The disappointing results at the headline level reflected the changes taking place within Barclays. Fixed-income, currencies, and commodities revenue (or, FICC), the largest single source of income for its investment bank, decreased by 16 percent in the fourth-quarter. Overall, investment banking income, which also includes proceeds from underwriting and mergers advisory, dropped 5 percent from the year-ago quarter. Of course, declining FICC revenue is not a phenomenon unique to Barclays; FICC revenue at the five largest U.S. investment banks decreased 4.2 percent to $10.2 billion in the fourth-quarter, according to Bloomberg data. Plus, Deutsche Bank (NYSE:DB) experienced a 27 percent drop in revenue at its investment banking and trading division.

Meanwhile, compared to 2012′s full-year results, the bank’s investment banking full-year pretax profit fell 37 percent — dropping to 2.52 billion pounds, or $414 billion, missing the 2.99 billion pounds expected by analysts. Investment banking revenue dipped 9 percent to 10.7 billion pounds, or $17.57 billion.

“The big question for Barclays is whether its investment bank can earn a return on equity above its cost of capital,” Mediobanca analyst Christopher Wheeler, who has an outperform rating on the stock, told Bloomberg. “The costs were just so much higher than we were expecting,” he added.

Barclays’s profits were “impacted by the restructuring and de-risking activity” the bank completed in 2013, explained Jenkins in the earnings press release. “This included withdrawing from certain lines of business, investing to transform our operations and resolving legacy conduct and litigation issues. The cost of these actions suppressed statutory profits to [$4.76 billion] in the year but was in the long-term interest of our shareholders.” Costs as a proportion of revenue “rose in 2013 mainly as a consequence of reduced income, but we remain committed to achieving a ratio in the mid-50s by 2015,” he added. ”We begin 2014 in a healthier position,” Jenkins concluded. “We have put a lot of legacy issues behind us. We have every reason to feel positive about our results.”

Yet, as a top shareholder told CNBC, “Antony Jenkins is increasingly running out of time,” to reform and resurrect the bank. Investors’ ire began to solidify on Monday when it was revealed that around 27,000 customer files had been stolen and the bank released headline results a day early. The Tuesday earnings release confirmed fears and spawned a new one: the overcompensation of top executives. The bank’s compensation to income ratio — a measure of how much of its earnings is used to pay salaries and bonuses — rose to 43.2 percent.

In a post-earnings conference call, Jenkins said the increase was the result of the banks desire to pay for performance and pay competitively. However, the bank is “committed” in decreasing the ratio in the future, and Jenkins has already turned down his 2013 bonus on the premise that regulatory penalties and lawsuits have continued to impose too high costs on the bank to warrant the additional compensation.

Investors — who advanced shares a modest 8.24 percent in 2013 — responded negatively to the release, bidding shares down as much as 4.01 percent, to $17.48, in early morning trading on Tuesday. Equally shocking to investors and analysts was the fact that the bank’s dividend amounted to just 6.5 pence a share, or $0.11 per share, for a total of 859 million pounds, or $1.41 billion. “It cannot be right in any business for the executive bonus pool to be nearly three times bigger than the total dividend payout to the company’s owners,” Roger Barker, director of corporate governance at the Institute of Directors, told Bloomberg in an e-mailed statement. “The question must be asked –- for whom is this institution being run?”

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