Barclays PLC’s (BCS) adjusted net income attributable to shareholders came in at £2.6 billion ($4.0 billion) for first nine months of 2014, almost stable compared with the prior-year period level. This was mainly due to weaker investment banking income as the company continued to face lower client activities.
Notably, Barclays created a provision of £500 million ($807 million) related to the on-going investigation regarding alleged manipulation of foreign exchange rates. Apart from this, an additional provision of £170 million ($263 million) was made to cover the payout over payment protection insurance (PPI) redress.
Fall in operating expenses acted as a tailwind. Further, the performances of all segments except Investment Bank and Africa Banking were impressive. Capital ratios too remained strong. However, lower net operating income owing to decline in market revenues dragged the results.
Performance in Detail
Adjusted net operating income was £18.1 billion ($30.0 billion), down 4% year over year.
Adjusted profit before tax grew 5% from the year-ago period to £4.9 billion ($8.0 billion). The rise was mainly driven by improvements in Personal and Corporate Banking, and Barclaycard, partially offset by a reduction in the Investment Bank and adverse currency movements in Africa Banking.
Notably, statutory profit before tax rose 31% from the year-ago comparable period to £3.7 billion ($6.0 billion).
Operating expenses (excluding Transform-related costs, and litigation and conduct charges) totaled £12.1 billion ($20.0 billion), down 9% year over year. Cost to income ratio was 67%, in line with the prior-year period.
Segment Details as of Nine Months Ended Sep 30
Personal and Corporate Banking: Profit before tax came in at £2.3 billion ($4.0 billion), up 18% from the prior-year period. The rise was attributable to growth in net operating income, lower operating expenses and a fall in credit-impairment charges.
Barclaycard: Profit before tax came in at £1.1 billion ($2.0 billion), increasing 21% from the year-ago period. The rise was driven by continued net lending growth and improved efficiency.
Africa Banking: Profit before tax came in at £756 million ($1.3 billion), down 11% from the prior-year period. The fall largely reflected lower net operating income.
Investment Bank: Profit before tax dropped 38% from the year-ago period to £1.3 billion ($2.0 billion). A 20% decline in market revenues was the primary reason behind the fall.
Head Office and Other Operations: Profit before tax was £106 million ($177 million), compared with a loss before tax of £154 million ($238 million) in the prior-year period.
Barclays Non-Core: Loss before tax amounted to £648 million ($1.1 billion), improving from a loss of £965 million ($1.5 billion) incurred in the year-ago period.
Balance Sheet and Capital Ratios
Total assets as of Sep 30, 2014 came in at £1,365 billion ($2,203 billion), up 2% from Dec 31, 2013 level. As of Sep 30, 2014, Common Equity Tier (CET) 1 ratio was 10.2%, up from 9.9% as of Jun 30, 2014. The company remains on track to achieve the CET target of 10.5% by 2015.
Total risk-weighted assets fell nearly £29 billion from the beginning of the year to £413 billion ($666 billion) as of Sep 30, 2014. The decline was mainly caused by Investment Bank and Barclays Non-Core risk reductions.
Further, the Prudential Regulation Authority (PRA) leverage ratio was 3.5% as of Sep 30, 2014.
Updates on ‘Transform’ Program
In 2013, Barclays announced a strategic cost management program – Transform – targeted at lowering net operating expense by £1.7 billion to reach £16.8 billion by 2015. The initiative is being executed and managed through rightsizing, industrialization and innovation measures.
Barclays has already incurred £1.2 billion ($2.0 billion) of costs related to Transform in 2013. In addition, £826 million ($1.4 billion) was incurred by the company in the first nine months of 2014. Notably, management expects Transform-related costs to be £1.3 billion in 2014, £700 million in 2015 and £200 million in 2016.
Our Viewpoint
We expect Barclays’ diversified business model and sound financial position to consistently support its overall future growth. Moreover, the bank’s expense-reduction initiatives as well as restructuring plans are expected to raise investors’ confidence in the stock.
However, possible litigation headwind arising from the regulatory investigations remains a plausible concern. In addition, slow revenue growth, tepid economic recovery and a stringent regulatory landscape will continue to weigh on the company’s performance in the near term.
Barclays currently carries a Zacks Rank #3 (Hold).
Performance of Other Foreign Banks
Credit Suisse Group AG’s (CS) net income attributable to shareholders came in at CHF1.03 billion ($1.12 billion), increasing significantly from CHF454 million ($497 million) in the year-ago quarter. Results were aided by strong investment banking performance, partially offset by higher provision for credit losses and operating expenses.
UBS AG (UBS) reported third-quarter 2014 net income attributable to shareholders of CHF 762 million ($834.2 million), which compared favorably with the prior-year quarter earnings of CHF 577 million ($619.1 million). The results were driven by elevated net interest income, and increased net fee and commission income.
Deutsche Bank AG (DB) reported net loss of €92 million ($122 million) in the third quarter of 2014, compared with an income of €51 million ($67.5 million) in the prior-year quarter. Lower provision for credit losses and higher revenues were more than offset by an increase in non-interest expenses.
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