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Barclays - Conduct charges push bank to a loss

George Salmon | 26 April 2018 | A A A
Barclays - Conduct charges push bank to a loss

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Barclays plc Ordinary 25p

Sell: 171.64 | Buy: 171.68 | Change -1.30 (-0.75%)
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Barclays reported a first quarter loss before tax of £236m, following litigation and conduct charges of £2bn. Excluding those charges, quarterly profits rose 1% to £1.7bn.

The shares were broadly flat in early trading.

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Our View

The years Barclays spent trying to get back into shape finally look set to pay dividends (6.5p in 2018). The new Barclays is a slimmer, if not yet fitter, beast - albeit one with aspirations of transatlantic grandeur.

The UK business 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 includes the business banking operations serving larger enterprises, a City and Wall Street investment bank, international card operations and payments.

But the bank's certainly not gold medal-winning yet.

Income growth is proving a struggle. There seems to be a new "exceptional" charge every quarter in the UK business, with operating costs also rising. The investment bank is improving, but currency headwinds mean it isn't joining in the bonanza some US rivals have enjoyed.

Barclays was always going to be more marathon than sprint though.

The bank will be glad it's clearing the backlog of regulatory hurdles, (even if they're proving expensive) and more than a little relieved that CEO Jes Staley has been permitted to remain at the helm after attempting to uncover the identity of a whistleblower. With legacy issues put to bed, the bank can focus on the future.

While it's not out of the woods yet, it's difficult to argue that Barclays hasn't made significant progress. If it can deliver the 9%+ return on equity it's targeting by 2019 then this year's dividend hike, which would see the bank yield 3.1% in 2018, might just be the first of several.

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Trading details

Underlying profit growth reflects a 45% fall in bad loans and 6% decline in operating costs. However, this was partially offset by an 8% fall in income.

Barclays UK saw total income shrink 3% to £1.8bn, with both interest and fee income in decline. Impairments for bad loans rose 13% to £201m, with operating expenses also creeping up. Divisional profits (before conduct charges) were £581m, 17% below the same period last year.

The fall in total income came despite a 12% increase in the total value of loans to customers, and reflects a decline in net interest margin to 3.27% following the integration of assets from the old bad bank.

Profits of £1.4bn were up 4% in Barclays International, despite an 8% fall in total income. That largely reflects a decline in bad loans and lower operating expenses - with currency movements playing a significant role.

The corporate and investment bank saw profits rise 48.7% to £1.2bn, with profits in international cards falling 58% to £238m.

Head office losses were £1.8bn, US conduct fines.

Barclays took £2bn in conduct and litigation charges in the quarter, including £1.4bn for mis-selling US Residential Mortgage Backed Securities and a £400m charge from PPI mis-selling.

As a result of these charges Barclay's CET1 ratio (a standard measure of bank capitalisation) fell 0.6 percentage points from the year end, to 12.7%.

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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.