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Barclays - Profits rise, with Non-Core to close early

Nicholas Hyett | 23 February 2017 | A A A
Barclays - Profits rise, with Non-Core to close early

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Barclays plc Ordinary 25p

Sell: 142.62 | Buy: 142.72 | Change -1.74 (-1.20%)
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Barclays Core businesses delivered a full year underlying profit before tax of £6.4bn in 2016, up 4%. Within this, the International and UK core operating businesses saw profits decline by mid-single digits, offset by profits from Head Office. The bank announced a final dividend of 2p.

The shares rose 2.5% following the announcement.

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 retail customers and almost a million smaller businesses with current accounts, loans, cards and mortgages, plus wealth management.

Meanwhile, Barclays Corporate & International 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, the bank needs to wind down the hodge-podge of assets held in its Non-Core, or bad bank, division. It's done a good job of this so far, with the division now expected to close ahead of schedule and the group agreeing terms on the reduction of its stake in Barclays Africa.

Although losses in the non-core division continue to depress earnings for now, the bank has at least been able to largely leave PPI charges behind it. Lower litigation and conduct charges are one of the key forces driving increased headline profit this year, helping reported profits to shoot up towards the underlying figure the bank prefers to report.

With the bad bank soon to be dismantled, and litigation charges falling, Barclays should be able to focus on its 'Core' divisions from here on in. Both divisions saw profits fall in 2016, but longer term Barclays should be left with two high quality financial services divisions.

Both Barclays UK and Barclays International will be a big player in its own right 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 at least 2018 to find out how good.

Full year results:

Group wide profits before tax more than doubled to £3.2bn, thanks largely to lower litigation and conduct costs offsetting a 3% fall in total income compared to 2015. Lower income was largely driven by increased losses in the Non-Core business.

The Core business, consisting of Barclays UK and Barclays International, saw income rise 6% year-on-year. This performance was reinforced by improved cost control, which helped the Core cost:income ratio improve from 62% to 61%.

The group has accelerated the run-down of its Non-Core business, with risk weighted assets (RWAs) within the division falling £22bn to £32bn. Assets sold include the Asia wealth & investment management, and Southern European cards businesses. The group now expect to be able to close the division in June this year, 6 months ahead of schedule.

Barclays' regulatory capital position, as measured by the Common Equity Tier 1 (CET1) capital ratio, improved to by 1 percentage point to 12.4%, helped by good organic capital growth and improvements in the pension scheme deficit.

The group saw a rise in provisions for bad loans, although this was partially driven by changes to its risk approach in the credit cards business.

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.