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Barclays - Investment bank struggles in tough environment

Nicholas Hyett | 25 April 2019 | A A A
Barclays - Investment bank struggles in tough environment

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Barclays plc Ordinary 25p

Sell: 186.84 | Buy: 186.92 | Change 0.26 (0.14%)
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Underlying profit before tax fell 10.5% to £1.5bn in the first quarter, as total income fell slightly to £5.3bn and bad loans increased substantially year-on-year. The poor performance was driven by the investment bank.

The group has said that it may cut costs further if challenging condition continue.

The shares fell 1.2% 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 22m 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 not yet the finished article. Income growth is proving a struggle and there seems to be a new "exceptional" charge every quarter, pushing up total operating costs.

The investment bank is at the heart of a growing row as well, with activist investor Edward Bramson arguing the division is uncompetitive and should be shrunk. Recent poor performance in the division isn't a great surprise, international rivals had flagged tough conditions across the market. But while Barclays is keen to point to a growing share of global banking fees, today's numbers will do little to take the pressure off the board.

The good news is that cost control looks to be improving substantially, helped by falling conduct costs. Management have made it clear they're willing to flex costs to achieve profitability targets if necessary.

Barclays was always going to be a longer term project. If it can deliver the 10%+ return on equity it's targeting by 2020, and do that consistently, then this year's dividend hike, which would have the bank yielding 4.5% in 2019, might be the first of several.

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First Quarter Results

Barclays UK saw net income fall 1% to £1.8bn, as pressure on mortgage pricing continued and a reduced risk appetite in the light of economic uncertainty dented performance in UK cards. As a result, net interest margins (the difference between what the bank charges on loans and pays on deposits) fell slightly to 3.18%.

The UK business saw a 5% decline in bad loans, to £191m, as economic conditions remained benign and total risk in the portfolio reduced. Operating expenses in the division fell 1%, thanks to non-recurrence of ring-fencing costs from last year and cost efficiencies.

Total income in Barclays International fell 6% to £3.6bn, driven by an 11% fall in income from the investment bank. Reduced volatility hit results in the trading business, while less corporate activity meant global banking fees shrank (although Barclays' share of the global fee pool has increased since 2018). The global credit cards business saw income rise 6%, supported by currency moves and growth in US cards.

Bad loans in the international business increased 163%, primarily due to a favourable assessment of underperforming loans in the US this time last year. Total operating expenses in the division fell 4%, driven by a reduction in performance related pay.

Conduct and litigation costs across the group fell substantially year-on-year to just £61m this quarter. Excluding these costs, the group cost:income ratio improved marginally to 62%. Return on Equity was 9.6%, in line with the target of greater than 9% this year.

Group CET1 Capital (an important measure of banking capitalisation) fell slightly quarter-on-quarter to 13%.

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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.