Barclays turnround at a pivotal point

Is Barclays about to break free after years of being weighed down by litigation and restructuring costs to finally become an attractive proposition for investors?

Or will chief executive Antony Jenkins have his dreams of being hailed as a turnround champion by investors shattered as regulators keep fining the bank and tying it up with new rules?

Some big institutional investors have made up their minds, even before Barclays on Wednesday added another £800m to its £2bn provision for the expected cost of an investigation into foreign exchange market manipulation.

A senior fund manager at a big City of London institution says: "Barclays is just uninvestable. It is too complex. How do you begin to work out the litigation risk?"

The sceptics were in the ascendancy after the forex provision contributed to a halving of the bank's first-quarter net profit. Its shares fell almost 2 per cent.

But some analysts can see potential for Barclays to turn the corner this year. "Given the higher bank levy and currency headwinds they are actually over-delivering," says Joseph Dickerson, banking analyst at Jefferies.

This nascent optimism has, in part, been fuelled by the all-action tone of a letter sent by John McFarlane to shareholders when he succeeded Sir David Walker as Barclays chairman at last week's annual meeting.

Mr McFarlane pledged to impose greater cost discipline, to reallocate capital away from underperforming parts of the bank and to "put in place plans and action to improve them or curtail those that are unable to be resuscitated".

His forthright assessment of where the bank was falling short of its potential has reignited speculation in some quarters that he may be tempted to replace Mr Jenkins as CEO if the bank's recovery slides off the rails.

But analysts think it is more likely to signal an acceleration of the existing strategy. Indeed, Barclays is keen to point out that its "core" business - excluding the unwanted assets moved into a non-core unit last year - is performing relatively well, helped by a rebound in its investment bank that like its rivals enjoyed the benefits of higher volatility in the first quarter.

In the first quarter, Barclays core revenues rose 2 per cent, costs fell 2 per cent and provisions for bad debts fell 7 per cent, producing a 14 per cent rise in adjusted pre-tax profits. Return on equity was close to its 12 per cent target more than a year ahead of schedule and its ratio of costs to income dropped to a healthy looking 61 per cent.

However, this upbeat picture of what a future Barclays may look like is tainted by a couple of negative factors.

The first is the non-core unit set up by Barclays last year to house various unwanted businesses, which increased losses in the first quarter to £256m, as the bank reduced its risk-weighted assets by £10bn to £65bn.

The second factor stopping investors from piling into Barclays shares, which trade at a discount of more than 15 per cent to tangible book value, is the risk of big fines.

In the past four years, it has been hit by more than £9bn of conduct and litigation charges, according to Standard & Poor's. These include more than £5bn of compensation for mis-selling payment protection insurance in the UK and a £290m fine for Libor manipulation.

The bank's annual report lists eight pages of "legal, competition and regulatory matters" - ranging from allegations of manipulating the price of gold to misleading customers of its anonymous "dark pool" trading venue.

But the bank says the expected forex settlement is the last big litigation risk on its horizon and analysts tend to shrug off the risk of more fines.

"Litigation has become a cost of doing business for almost every big bank and it is very hard for analysts and investors to get a handle on the cost of this," says Mr Dickerson at Jefferies.

Crucially for Barclays, most analysts seem convinced of its ability to hit the targets it set out last year as part of its radical restructuring of its underperforming investment bank. The question now is how soon can the bank get back on the front foot and start building profitable growth.

"The past couple of years have all been about capital strengthening and controlling costs for Barclays," says Andrew Coombs, analyst at Citigroup.

"Both are still important but the whole thing is shifting now and they need to focus on growing the core return on equity, reducing the drag from the non-core unit and increasing book value."

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