Barclays' earnings of £433 million, 2.7p per share, in the first quarter equated to an unimpressive 3.8% return on equity for the no-moat bank. We’re likely to reduce our £3 fair value estimate as we incorporate Barclays’ weak performance and softening growth projections into our fair value estimate.
The best news, in our opinion, was the lack of bad news
We saw both good news and bad news in Barclays’ results. The best news, in our opinion, was the lack of bad news; Barclays didn’t report any large legal charges in the first quarter, and its performance in investment banking was better than expected given the difficult environment. We were also pleased with the bottom-line performance of the core business, which saw profits improve 18% compared with the year-ago quarter on the non-recurrence of heavy litigation and restructuring charges in 2015.
The core 10.7% return on average tangible equity in this unfavourable environment supports our projection that Barclays can earn an 11% return on tangible equity once it reaches a steady state. New CEO Jes Staley is also making good progress on the company's noncore run-down, having completed the sale of the Portuguese retail business and announcing sales of the Italian retail and Asian wealth businesses. Noncore risk-weighted assets are down 6% since year-end, and operating expenses, excluding an offsetting increase in restructuring costs, are down 19%.
However, the underlying results showed less to get excited about. Revenue fell 2% year over year in core Barclays U.K. on lower fee income and a stronger mortgage competition. Core Corporate & Investment Bank also saw a 4% year-over-year drop in revenues, although this can be seen as a good result, given the steeper drops at its U.S. counterparts.
Barclays’ capital position was largely unchanged, with a fully loaded common equity Tier 1 ratio of 11.3%. We continue to think Barclays will need to bulk this up and see little room in the near term for a dividend increase from the March 1 cut. The new 0.5% countercyclical buffer means that Barclays’ new mandatory distribution hurdle is 11.7%, and management will need to maintain a 1% to 2% buffer on top of that.