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Barclays - Well received Q1 results

Steve Clayton | 27 April 2016 | A A A
Barclays - Well received Q1 results

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Barclays plc Ordinary 25p

Sell: 171.72 | Buy: 171.74 | Change -0.04 (-0.02%)
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The UK focussed banks have been among the hardest fallers following the vote to leave the EU. Exactly what Brexit will mean for UK banks remains unclear, but there are a number of concerns that have driven prices down, which we have looked in more detail in our latest article 'Why are the banks suffering the most from Brexit?'

Given the recent market reaction all eyes will be on the banks' next set of results. Half year results are expected on 29 July, when we should get a better idea of exactly what the Bank thinks Thursday's vote means for them.

27 April 2016: Pre-tax profits of £1.6bn in Barclays Core operations were 18% ahead of Q1 last year, but the Group's overall result was skewed downward by increased losses from running down the non-core operations. The Group reported Q1 profit before tax was £793m, versus £1,057m last year. The shares rose over 3% in early trading.

Barclays UK delivered a resilient performance, despite margin pressure in mortgages and deposits, with lower costs and impairments almost offsetting the fall in income. Profits dipped 2% to £704m and the Return on Tangible Equity (RoTE) remained high at 20.5% (2015: 24.0%).

Corporate and Institutional RoTE was 9.5%, down from 10.9% in the prior year as weakness in the investment banking operations offset very strong growth in international Cards income. Divisional profits doubled to £1,027m.

The Non-Core delivered negative income, as guided at the full year stage and an overall loss of £815m before tax, with the biggest swing factor coming from losses in the divisions Education, Social Housing and Local Authorities portfolio.

Barclays incurred £12m of Regulatory fines in the Core businesses during the quarter, compared to just over a billion pounds in the prior year. Capital ratios were little changed, with the common equity Tier 1 ratio dipping 10bp to 11.3%. Tangible assets per share were boosted by retained earnings, rising to 286p, from 275p in 2015.

Barclays say their cost reduction plans are on track and operating expenses will be circa £12.8bn for the year and they are confident of hitting their longer term cost: income ratio target of 60%, even though the current rate is still 76%.

Barclays say they have seen encouraging interest in their stake in Barclays Africa, but have yet to select their route towards reducing it.

The Non-Core rundown saw a reduction in Risk Weighted Assets of £3bn to £51bn in the quarter. Announced, but uncompleted disposals of businesses in Portugal, Italy and Asia will see a further reduction of £3.4bn of Non-Core RWAs, later this year.

Outlook:

Barclays are confident in the potential of their Core operations and their ability to exit the Non-Core over time. But they are taking a cautious near term view, ahead of the EU Referendum. The investment bank's performance in April is so far slightly down on the level of Q1.

Our view:

Barclays new structure keeps things simple. Barclays UK contains the bits we all recognise as Barclays, a High Street bank, serving 22 million of retail customers and almost a million smaller businesses with current accounts, loans, cards and mortgages, plus wealth management. The bank will have around £70bn of risk weighted assets (RWAs) and £200bn of leverage, with a loan to deposit (LTD) ratio of circa 95%.

Barclays Corporate & International will have the larger balance sheet, RWAs of around £195bn, £575bn of leverage and a LTD ratio of circa 85%. It will contain the business banking operations serving larger enterprises, a City and Wall Street investment bank and international cards operations and payments.

Before we get to this nice, simple structure, there are still around £50bn of non-core assets to wind down or dispose of and this is depressing earnings in the near term, for the non-core division is expected to generate negative income of around £200m per quarter and will have its own operating costs to bear too. Hence the lowered dividends.

It is taking a long, long time to sort Barclays out, but under Mr Staley it finally looks like the bank is taking it seriously. The loss of the African business will either prove to be a blessing, if South Africa goes down the tubes, or a huge missed oppportunity, if Africa does really make it in the next decade or two. Ironically, Bob Diamond, the former CEO, is currently trying to build a pan-African commercial bank and is reported to be putting together a bid for some or all of the division. Please, don't let it be him, as the National Lottery adverts say.

When it is all over, Barclays should have two high quality financial services divisions, each big players in their own, limited choice of activities, earning decent returns on equity, although as always with banking, they will be cyclical. Eventually, the dividend potential ought to be good, but investors will have to wait until 2018 at the earliest to find out how good. Lloyds, of course is further down the course of reshaping itself and already busily ramping up its own dividend payouts.

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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