Fitch: Barclays Q113 Solid; Restructuring Costs Weigh on Operating Performance

Thu Apr 25, 2013 10:19am EDT

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(The following statement was released by the rating agency) MILAN/LONDON, April 25 (Fitch) Barclays plc ('A'/Stable/'F1'/'a') announced solid underlying operating profit in Q113, which however was affected by GBP514m costs related to the bank's operating expense reduction programme, according to Fitch Ratings. Under the bank's revised strategic plan announced in February 2013, Barclays plans to reduce annual operating expenses by GBP1.7bn by 2015, incurring additional one-off costs of about GBP1bn in each of 2013 and 2014 and GBP0.7bn in 2015. In line with the agency's expectations, the group further strengthened its capital ratios and maintained strong liquidity. As a result of the restructuring costs, pre-tax profit, excluding the impact of fair-value changes on own debt, fell 25% compared with Q112. Excluding the Q113 restructuring cost and the GBP300m charge for PPI redress in Q112, pre-tax profit in this quarter was 15% lower than in Q112, and the adjusted net return on tangible common equity (ROTCE) stood at 12.8% (Q112 adjusted ROTCE: 13.6%). Fitch considers Barclays' performance adequate, taking into account that the bank's reorganisation programme should result in structurally lower operating expenses and therefore improved sustainable profitability over time. Adjusted pre-tax profit at the investment bank amounted to GBP1,315m, up 11% compared to Q112 and 73% higher than in Q412. Q113 net revenue remained broadly flat as a 6% decline in fixed income net revenue was compensated by a 19% increase in equities and prime services and 8% growth in investment banking. Barclays saw lower contributions in Q113 from its rates, commodities and emerging markets business following a strong Q112 but saw some improvements in securitised products. Equities and prime services benefited from better market conditions, but also from market share gains. The decline in fixed income revenue was broadly in line with peers, but higher revenue in equities demonstrated that the bank has been able to expand its market share in this segment. Operating expenses in the investment bank in Q113 included a GBP116m restructuring charge, and overall operating expenses remained broadly flat year-on-year (Q112 operating expenses included a GBP115m charge relating to the setting of interbank offered rates). As a result, the division's cost/income ratio remained solid at 63%. Corporate banking saw adjusted pre-tax profit decline by 10% to GBP183m, mainly because of continued losses in European operations (pre-tax loss of GBP114m), which were affected by restructuring charges while loan impairment charges improved. UK corporate banking saw pre-tax profit improve as income increased and loan impairment charges declined. Barclays' retail and business banking operations showed solid performance in the UK, where adjusted pre-tax profit increased by 29% year-on-year to GBP299m, and Fitch expects profitability in this segment to remain resilient. Net revenue remained flat as lower contributions from interest rate hedges were offset by volume growth. Loan impairment charges increased by 17% year-on-year but remained modest at 27bp of gross loans. Operating expenses, excluding a GBP300m charge for PPI redress in Q112, fell 7%. Retail and business banking (RBB) operations outside the UK performed weakly, with Europe RBB affected by the restructuring charge and high loan impairment charges. Compared to Q412, however, Europe RBB income increased. Africa RBB reported a small GBP81m adjusted pre-tax profit, down 39% year-on-year, mainly the result of adverse foreign exchange movements and still high loan impairment charges. Fitch expects Barclays' European RBB operations to remain a drag on the group's profitability as loan impairment charges are likely to remain high, but they should remain manageable. The restructuring of the European businesses should improve efficiency, but the unit is unlikely to contribute materially to group profit. Barclaycard reported GBP363m adjusted pre-tax profit, up 5% year-on-year, and benefited from higher income as the business saw sustained growth, particularly in the UK and US. Loan impairment charges increased significantly by 21%, and were equal to 340bp of gross loans. Fitch expects Barclaycard to continue to perform well, but loan losses will inevitably remain higher in this segment. Barclays' fully-loaded Basel III common equity Tier 1 (CET1) ratio improved to 8.4% in Q113 (end-2012: 8.2%), which brings the group more in line with some of its leading peers, consistent with Fitch's expectation that the group will maintain capital ratios in line with peers. The bank's estimated Basel III CET1 ratio on a look-through basis includes management's expectations that they will mitigate the negative impact of about 95bp on the CET 1 arising from holdings in financial institutions, which under Basel III are deducted from CET1. Liquidity remains a strength for Barclays' ratings. The group's liquidity pool declined to GBP141bn at end-March 2013 (2012: GBP150bn) and cash and deposits with central banks in the pool declined as holdings in government bonds increased. Fitch considers liquidity at this level sound given that liquid assets cover unsecured wholesale funding due in less than one year (GBP98bn) by 143%. Sound liquidity is also reflected in Barclays' estimated 110% Basel III liquidity coverage ratio and the 98% loan/deposit ratio in RBB, Corporate Banking and Wealth and Investment Management. Contact: Christian Scarafia Senior Director +39 02 87 90 87 212 Fitch Italia S.p.A. 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