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Barclays - Strong Core performance

Nicholas Hyett | 29 July 2016 | A A A
Barclays - Strong Core performance

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Barclays plc Ordinary 25p

Sell: 189.10 | Buy: 189.14 | Change 4.84 (2.63%)
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Barclays shares are trading up 4.3% this morning, following the announcement of results for the first half. The Core UK and Corporate & International businesses delivered substantially improved profit before tax (PBT) of £3.9bn (H115: £3.3bn), but was offset by losses of £1.9bn in the Non-Core business, resulting in an overall reported PBT of £2bn (down 21% on a year earlier).

Basic earnings per share fell 30% to 6.9p, driven by the losses in the Non-Core business. An interim dividend of 1p was announced (H15: 2p), in line with guidance.

The cost:income ratio improves slightly from 71% to 70%, with net interest margin in the UK business also seeing a slight improvement to 3.59%. Barclays has continued to strengthen its balance sheet with the CET1 (common equity tier 1) capital ratio improved to 11.6% (FY15: 11.4%).

The run-down of the Non-Core business continued, with risk weighted assets falling by £8bn to £46.7bn. Barclays has also sold 12.2% of Barclays Africa reducing its current stake to 50.1%.

Core Division

Within the Core business, Barclays UK saw underlying profits fall 4% to £1.3bn, driven by a 1% fall in total income and 10% increase in credit impairment charges, partially offset by a 1% fall in operating expenses.

Underlying profits at Barclays Corporate & International fell 10% to £2.3bn, driven by a 4% increase in operating expenses due to the fall in Sterling and increased structural reform charges. The division also saw a 33% increase in credit impairment charges largely as a result of counterparties in the oil & gas sector.

Total Core operating expenses reduced 10%, driven by lower litigation and conduct charges and savings from the strategic cost programme, partially offset by the fall in Sterling and increased restructuring costs. The group continues to target full year cost of £12.8bn.

CEO James Staley commented:

"We remain confident that it is the right plan for Barclays, and see no reason to adjust it, or the pace of delivery, in light of the vote by the UK last month to exit the EU."

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 £45bn of non-core assets to wind down or dispose of. This is depressing earnings in the near term, for the non-core division is expected to generate negative income 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 things 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 opportunity, if Africa does really make it in the next decade or two.

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.

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.