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Barclays - Q3 profits fall 10%

Steve Clayton | 29 October 2015 | A A A
Barclays - Q3 profits fall 10%

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Barclays plc Ordinary 25p

Sell: 172.32 | Buy: 172.38 | Change 2.62 (1.55%)
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Barclays has announced Q3 results that show adjusted profit before tax falling 10% to £1,427m versus the prior year (Q3 2014: £1,590m), and 23% lower than the previous quarter (Q2 2015: £1,849m). Statutory profits rose 5%, reflecting lower charges for conduct and losses on disposals.

The market was unimpressed, not least because the statement gave a downbeat report on recent performance at Barclays' Investment Bank. The shares were 3% lower in early trading.

Yesterday, Barclays had confirmed that James E Staley (Jes) would join as CEO on December 1st. Chairman John Macfarlane expressed pleasure at Mr Staley's appointment. The future direction of the Group has been agreed with Mr Staley, but Barclays is not going to update the market on this until it has agreed its plans for structural reform with the regulator. Further updates on this will be provided with the full year results.

For the nine months, adjusted profits rose by 4%, driven by a 7% increase in profits in the Core operating businesses. Group adjusted return on equity improved to 7.1% (2014: 6.3%) and operating expenses dropped by 5%. Return on Equity for the Core businesses was flat at 10.5%.

Non-Core assets continue to run down, with a £2bn reduction in the quarter to £55bn. A further £1.7bn reduction will occur when the sale of Barclays' Portuguese retail business completes in Q1 2016. The Common Equity Tier One ratio was flat at 11.1%, whilst the leverage ratio edged up to 4.2% (Jun 30, 2015: 4.1%).

Unlike Lloyds, Barclays made no new PPI provisions in the quarter, but they did make an additional provision of £290m for customer redress on historic FX transactions. Total UK customer redress provisions taken so far in 2015 amount to £1,322m (2014: £910m).

The Core business achieved a cost:income ratio of 61% for the nine months (2014: 63%).

Profit growth for the nine months was strongest in the Investment Bank, +31%, Barclaycard profit rose 16% and the Personal and Commercial Bank profit rose by 14%. Losses in the non-core rose by 31% and diluted the overall group return on equity by 3.4% (2014: 4.1%).

Net Tangible Assets per share rose by 10p to 289p.

Guidance:

2016 Core costs are expected to be £400m higher than previously seen, reflecting additional structural reform costs, £100m of which will also be taken in 2015, with a remaining £500m to be taken in 2017 and beyond.

Changes to UK taxation mean that 2016 Core return on equity (excluding restructuring costs) is now seen at 11%. The drag on Group RoE from the Non-Core will be affected by the accelerated run-down of non-core assets. The Investment Bank has had a tough October, compared to the prior year. Barclays say it is too soon to assess the likely Q4 outcome.

Our View:

John McFarlane moved quickly to take a knife to some of the issues that have held Barclays back. The non-core division, housing all the stuff that had seemed like a good idea at the time, is to be shrunk faster, though at what cost, remains to be seen. We have to assume Jes Staley shares the vision, but Barclays plans need regulatory approval, until they have that, we are not to be told exactly what comes next for the Group.

So far, focus, focus, focus has been the mantra. Focus on core strengths, like Barclays UK retail and business banking, Barclaycard and the African businesses. Even parts of the Investment Bank are judged worthy of backing, although clearly, this division is going to see plenty more change, given that the comments today showed that whilst the IB may have had a decent nine months, the tenth month has shown a return to bad habits.

The cost: income targets, if met, ought to see significantly better returns generated at Barclays with much stronger capital generation. If so, that in turn could see the dividend returning to meaningful growth rates. Near term though, the costs of unwinding the non-core, disposing of over £30bn of "challenging" risk weighted assets (RWAs) will not be cost-free and could hold back capital generation and dividends near term, if provisioning proves to have been insufficient.

The market has so far been somewhat sceptical about Barclays' plans. After initially giving the interims a warm welcome, the stock has drifted lower through the autumn. In the near term, a 6.5p dividend implies a yield of a little over 2.5% and perhaps little growth for a while to come. So investors need to be confident that John McFarlane and Jes Staley can pull the transformation off. But with the shares trading at a significant discount to tangible asset value, there is not too much hope and expectation ahead already baked in there.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.


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