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Barclays - Bad bank good, good bank bad

Nicholas Hyett | 28 July 2017 | A A A
Barclays - Bad bank good, good bank bad

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Barclays plc Ordinary 25p

Sell: 142.62 | Buy: 142.72 | Change -1.74 (-1.20%)
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First half profits before tax (PBT) rose 13% at the group level, to £2.3bn. However, the improved performance was largely driven by a better performance in the Non-Core 'bad-bank' with the Core business seeing profits fall.

The shares were broadly flat following the announcement.

Our View

The two core divisions that will make up Barclays' new structure keep 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.

Barclays Corporate & International will contain the business banking operations serving larger enterprises, a City and Wall Street investment bank, international cards operations and payments.

Meanwhile the hodge-podge of assets held in its Non-Core, or 'bad bank', division have now dwindled to the point where they can be swallowed by the rest of the bank without causing too much indigestion, and losses have fallen dramatically.

It's just a shame the 'good bank' hasn't performed as well. PPI provisions have reared their ugly head again, but even putting those to one side, the bank is struggling get income moving in the right direction. Bad loans, although still low, are ticking up, and the performance of the investment bank remains mixed. The markets division has been disappointing recently, and saw a 5% fall in income at the half year stage. This means Barclays is still lagging others in the sector.

However, the real worry for investors will be the queues of lawyers and regulators waiting to haul the bank over the coals for past misdeeds. 23 separate investigations are named in results, involving teams from the FCA, PRA, SFO, DoJ and SEC - a veritable ABC of finance regulators from both sides of the Atlantic. CEO Jes Staley is also under investigation for attempting to uncover the identity of a whistleblower.

While we like the direction Barclays is heading in, the problem is that at present it doesn't seem to be travelling very quickly. That might be understandable given the amount that's been going on at the bank, it's had five CEOs in seven years. When the bank eventually sorts itself out, the dividend potential ought to be good, but investors will have to wait until at least 2018 to find out how good.

First Half Results

Total income across the bank fell 1% to £10.9bn in the first half, with Core falling 2% to £11.4bn and Non-Core outflows reducing to £530m. Within Core, the UK retail business saw income slip 2% to £3.7bn, while cards and investment banking business Barclays International grew 3% to £7.7bn.

The bank's improved profit performance was driven by losses in the Non-Core business reducing by almost two thirds, to £647m. PBT in Core fell 25% to £3bn, driven by severe weakness in Barclays UK following a £700m PPI provision and a 5% fall at Barclays International.

UK net interest margin, the difference between the price the bank pays to borrow and the price at which it lends, saw a 0.1 percentage point improvement to 3.69%. Bad loan impairments increased 17%, mainly reflecting changing mix in the Consumer, Cards and Payments business and underlying default trends in US cards.

At 71%, the group's cost to income ratio remains high as additional PPI charges offset cost savings from Non-Core. Barclays continues to target a cost: income ratio of less than 60% over time.

Barclays has completed the sale of 33.7% of Barclays Africa, allowing the group to deconsolidate the business. The sales resulted in a 0.47 percentage point improvement in CET1 capital (a key measure of bank capitalisation) and takes the group total to 13.1%.

Non-Core risk weighted assets fell to £23bn at period end (Dec 2016: £32bn), below the bank's £25bn guidance. The Non-Core business will now be wound up, with the remaining assets folded into the rest of the bank.

The group expects the full year dividend to total 3p per share, in line with previous guidance, of which 1p will be paid as an interim dividend.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.