Barclays' huge profit exceeds expectations

Go banks! After an inauspicious start by HSBC, results this reporting season have exceeded expectations, and the sector, the public's favourite whipping boy since the Credit Crunch, is on a roll. Lloyds whet the market's appetite with cracking figures midweek, and now Barclays is at a 16-month high as tumbling fines flattered its bottom line.

A year after promising to speed up restructuring, chief executive Jes Staley thinks he's "just months away" from wrapping up an overhaul of the high street bank. In fact, he's "more optimistic than ever" about prospects; and with good reason.

Fourth-quarter core operating profit of £954 million missed City estimates, but that's only because Barclays brought forward £390 million of bonus awards into 2016. Strip that out and Barclays beat forecasts on income, costs and profit.

For the full year, pre-tax profit almost tripled from £1.1 billion to over £3.2 billion, driven by a £3 billion decline in provisions for a catalogue of misdemeanours. Those include a £1.7 billion slump in charges for payment protection insurance (PPI).

On track

Add back tax and other costs and charges, and Barclays made an attributable profit of £1.6 billion compared with a loss of £394 million in 2015. Investors also liked a six basis-point increase in net interest margin - income divided by customer assets - to 3.62%, as the lender made more on deposits.

A common equity tier 1 (CET1) ratio - a key measure of a bank's financial strength - of 12.4%, driven by bigger profits, was impressive, too. Up from 11.4% a year earlier and 11.6% in September, it beat expectations by 60 basis points (bp).

"This puts us well on track to meet our end-state target and we are well-positioned to absorb headwinds over the next few years," said Staley. That target is 12.3-12.8% - 150-200bp above the minimum regulatory requirement. Remember, selling down its stake in Barclays Africa will also contribute over 75bp of regulatory capital.

After hitting a seven-year low in the aftermath of last June's Brexit vote, and following a near-4% rally Thursday, Barclays shares have comfortably doubled in eight months and sit at their best levels since October 2015.

An increase in tangible net asset value (TNAV) per share to 290p was a further beat, putting Barclays on just 0.8 times TNAV. Not enough, says Deutsche bank analyst David Lock who says 'buy' and tips the shares up to 270p.

In the near-term, Alistair Strang, technical analyst at Trends and Targets and regular Interactive Investor contributor, is "fairly optimistic" and thinks 254p is on. He said so last month with the shares much lower. At that level, Barclays hits the ruling downtrend since 2013. A breakout there would be hugely significant.

In terms of dividends, shareholders will receive a final dividend of 2p a share, taking the total to 3p. That's down from 6.5p in 2015, although the reduction was flagged a year ago. Expect another 3p in 2017.

As with Lloyds, and Royal Bank of Scotland earlier this week, which scrapped plans to sell hundreds of branches in favour of aiding challenger banks, Barclays is returning to something like normality.

There's still much to do, of course, and dividends will lag Lloyds for a while yet, but Barclays will shut its non-core division at the end of June, six months earlier than expected. If Donald Trump's delivers on his promise to lighten banking regulation in the US, and if US rates do move higher, as they should, financials could receive a further boost.

Trump's address to Congress on 28 February will give us more clues here.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.