Barclays Plc said it will sell down the stake in its Africa business, cut its dividend, and move more assets into its non-core unit as Chief Executive Officer Jes Staley laid out his strategy for the U.K.’s largest investment bank.
The lender will sell down its 62 percent stake in Barclays Africa Group Ltd. over the next two to three years to a level that allows it to deconsolidate the business, according to a statement Tuesday.
Fourth-quarter adjusted pretax profit, including restructuring costs, fell 56 percent to 247 million pounds ($344 million), according to the filing. That missed the 519 million-pound average estimate of five analysts surveyed by Bloomberg.
The moves are meant “to accelerate our strategy and simplify the group, as we prepare for regulatory ring-fencing requirements,” Staley, 59, said in the statement.
Staley is counting on his first results announcement and a revised strategy to reassure investors, who have been demanding bold moves to boost capital and returns as the bank languishes at its lowest valuation in more than three years.
In addition to selling down the African stake, the CEO has moved to address the underperforming investment bank. He previously announced 1,200 job cuts, the exit from seven countries in Asia, a hiring freeze and cutting the bonus pool to trim costs. The shares fell 7.6 percent at 8:28 a.m. in London trading. The stock has dropped 27 percent so far this year.
The African business had 9.5 percent of the bank’s risk-weighted assets at the end of 2015. Barclays has operated in the continent for almost a century and its stake in Johannesburg-based Barclays Africa Group Ltd. was built up under former CEOs John Varley and Robert Diamond.
“BAGL is a well-diversified business and a high quality franchise,” Staley said in the statement. “However the stake in BAGL presents specific challenges to Barclays as owners, such as the level of capital held in respect of BAGL, the international reach of the U.K. bank levy” and other reasons.
The divident cut
The company also cut its dividend to 3 pence per share for 2016 and 2017, from 6.5 pence last year. Ian Gordon, an analyst at Investec Bank Plc, had estimated the dividend would remain flat in 2016, while Raul Sinha at JPMorgan Chase & Co. had said shrinking the investment bank by 30 percent could fund an increase in the payout.
The dividend reduction, along with the African business move, will boost the firm’s common equity Tier 1 ratio by at least 1 percentage point, the company said. That measure was 11.4 percent at the end of 2015, up from 10.3 percent a year earlier.
Reducing the dividend for 2016 and 2017 was a “very difficult decision to make,” but will allow the bank to speed the shedding of non-core assets, Staley said in an interview with Bloomberg Television.
The CEO said the bank will get back to paying out “significant” percentage of profits in a dividend in 2018. “The dividend cut is justified, given the major restructuring ahead,” said Sandy Chen, an analyst at Cenkos Securities with a buy rating on the stock.
“No doubt the market won’t like the income miss, but trading at 0.5 of book value, this isn’t an expensive price for a decent future.”
The company added 8 billion pounds of risk-weighted assets to its non-core division, bringing the total to 55 billion pounds, and said it will speed up divestment of assets in that unit to reach 20 billion pounds by 2017. The businesses being transferred to non-core are wealth-management units in Asia and the Americas, units in at least nine countries including Egypt and Zimbabwe, and certain product lines in the investment bank.
Staley also unveiled a new structure for the lender, splitting it into two divisions to comply with U.K. law requiring the separation of banks’ consumer and investment banking arms by 2019.
The so-called U.K. ringfenced retail bank will have about 70 billion of risk weighted assets, whereas the non-ringfenced business, called Barclays Corporate and International, is almost three times as large with about 195 billion pounds of assets, according to the statement. It will house the investment bank, wealth management and the U.S. and international cards business.
“Focus will be on the new strategy with CEO Jes Staley laying out a clear roadmap to a much better capitalised and simplified group through the sell down of Barclays Africa and expansion of Non-Core,” Sinha of JPMorgan wrote in a note to investors Tuesday. Staley “can move Barclays away from being a value trap by allocating capital away from the investment bank, which is a sub-6 percent ROE business.”
The stock has fallen each of the past two years, leaving the bank trading at less than 50 percent of its book value. In July, Chairman John McFarlane, 68, pledged to double the share price over the next three to four years.
Barclays took another 1.45 billion-pound charge for improperly sold payment protection insurance in the fourth quarter, increasing the total cost of compensating customers for the scandal to about 7.5 billion pounds.
‘Manufacturing holds key to economic growth’
Barclays bank’s economist Naledi Madala has urged the country to consider manufacturing, as a key tailwind to drive the economy and reduce inequality.
She was speaking at a gathering organised by the bank which focused on economic outlook for 2019. “We should not make a mistake of leapfrogging without manufacturing,” said Madala, lamenting that the country’s diversification remains a pipeline dream, as the diamond is still the economy’s mainstay. She bemoaned that mining activities in the country could not spring forward diversification, though non-mining GDP has been steady over the years.
“Extractive industries are not good stepping stones for diversification, the sector does not prepare us for the next step,” said Madala at the Barclays’ Economic Outlook Forum Review 2019. The economist further noted that government should confront head-on challenges of productivity and competitiveness to attract the much needed Foreign Direct Investment (FDI). Though diversification efforts continue to hit a brick wall, Madala said the country should expect increased activities in the mining sector hinged to ramp up in coal production in the year ahead.
She also implored government to consider a welcoming attitude towards foreign investors and generous tax incentives to businesses that set up in the country. Madala is also upbeat that the use of public private partnership model could also help diversify the economy coupled with privitisation. “Privitisation will offer opportunities for growth, through the renewed optimism from government, as business confidence has improved,” said Madala.
She implored the government and the business community to access what is going to drive and hinder growth highlighting that key headwinds to growth are income inequality, diversification challenge and productivity, among others. “The pace of poverty reduction has slowed down, while income inequality goes up,” said Madala
MINISTER BEWAILS BAD REPAYMENT BY YOUTH
Minister of Youth Empowerment, Sports and Culture Development, Tshekedi Khama has told parliament his ministry continues to face challenges on the repayment of Youth Development Fund (YDF) loans.
Recently presenting the budget to Parliament, Khama said this financial year the ministry has received a total of 2582 YDF applications and approved 983of them to the value of P98 million. He said the programme attracts a high level of interest from youth but the ministry is only limited to funding a maximum of 1200 youth projects annually due to budget limitations.
“However the greatest challenge for the Fund is the repayment of the loan component by the majority of the youth businesses. The youth have advanced number of challenges for this including high rentals for operating spaces, low market access owing to tight competition and limited production capacities,” said Tshekedi, adding that they continue to pursue beneficiaries to repay the loans.
Out of the 919 businesses funded 1058 jobs have been created. The minister highlighted that disbursements of funds will continue to be undertaken until the end of the financial year. “The YDF is currently under review in line with the pronouncement made by the President, Dr Mokgweetsi Masisi in the State of the Nation Address, to improve beneficiaries through training, and encourage consortia and cooperatives,” said Tshekedi.
The ministry assists YDF beneficiaries in marketing their products and services through fairs and exhibitions. The ministry also runs entrepreneurship-training seminars for youth and in the past year 3692 young people were trained. Over 600 youth businesses attended fairs and exhibitions to market their products and services. Currently the ministry is collaborating with Local Enterprise Authority (LEA), First National Bank Botswana and Citizen Entrepreneurial Development Agency (CEDA) on training in entrepreneurship development and mentorship of YDF beneficiaries.
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