Fitch: Barclays' Weak 4Q13 Results Show Need to Improve Costs and Earnings

Wed Feb 12, 2014 11:41am EST

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(The following statement was released by the rating agency) LONDON, February 12 (Fitch) Fitch Ratings says that Barclays plc's (A/Stable/a) weak 4Q13 GBP191m pre-tax profit adjusted for a GBP95m loss on own credit and GBP79m goodwill impairment demonstrates that it will take time for the bank to improve its earnings generation significantly and achieve its planned cost cuts to reach its profitability target. A pre-tax loss in the investment bank and an inflexible higher cost base in the group, which included GBP468m costs to achieve efficiency gains, GBP220m provisions for litigation and regulatory penalties and a GBP504m UK bank levy booked in the quarter, were the main drivers of the 4Q13 performance, generating a Fitch-calculated adjusted pre-tax return on equity of 1.4% in the quarter. Barclays' 'a' Viability Rating is based on Fitch's expectation that the group will improve its profitability as operating costs are reduced, and that it will reach and maintain sound capitalisation. Barclays expects to incur further restructuring costs in FY14, when profitability is likely to remain under pressure, but performance should be helped by improving economic growth in its domestic market and by the sound performance of its UK retail and corporate banking and its international credit cards businesses. Fitch expects the group to meet its target to maintain a sound buffer above its minimum regulatory requirements, and the bank targets a 10.5% fully-applied Basel III Common Equity Tier 1 (CET1) by 2015, which it expects to increase to 11.5-12% by 2019. The bank also remains committed to further strengthening its leverage ratio. Barclays' 4Q13 adjusted pre-tax profit dropped 86% qoq, and it reported a GBP514m post-tax loss for the quarter. For FY13, Barclays' pre-tax profit adjusted for own-credit charges and goodwill impairment was GBP3.2bn, 38% lower than FY12 pre-tax profit adjusted for own-credit charges and gains from an asset sale. Conduct costs related to payment protection insurance and hedging derivative sales remained high at GBP2bn in 2013 (2012: GBP2.45bn) and continued to weigh on results. As a result, the bank's Fitch calculated adjusted pre-tax return on equity for FY13 remained under pressure at 5.8%. Barclay's Fitch core capital (FCC)/Basel III risk-weighted assets ratio improved by 180bp in 2H13 to about 11% at 4Q13, mainly reflecting the successful GBP5.8bn rights issue completed in the quarter. However, the bank's fully-applied Basel III Common Equity Tier 1 (CET1) ratio (including the impact of the capital raise) saw a modest 30bp drop in 4Q13 to 9.3% because of additional deductions from CET1 capital. Barclays was the first UK bank to disclose its regulatory 'Pillar 2A' capital requirement, which for 2014 is equal to 2.5 percentage points of risk-weighted assets. As parts of this Pillar 2A requirement have to be met with CET1 capital, Barclays estimates that its longer term CET1 ratio will range between 11.5% and 12% as the bank intends to hold a management buffer of up to 150bp over the fully loaded minimum CET1 ratio. Barclays substantively achieved the Prudential Regulatory Authority's (PRA) leverage ratio of 3% at 4Q13, reporting a ratio of 2.97%, almost 40bp higher than at end-3Q13. The group reduced its estimated PRA leverage exposure and issued GBP2.1bn of Basel III compliant additional Tier 1 instruments in the quarter. The bank reduced its leverage exposure by GBP119bn from 3Q13 to GBP1.36trn. Barclays aims for a leverage exposure of below GBP1.3trn. Barclays' investment bank generated a GBP329m pre-tax loss in 4Q13 (3Q13: GBP463m profit), primarily driven by higher operating expenses, which included a GBP333m UK bank levy and GBP220m provisions for litigation and regulatory penalties. Compensation increased as incentive awards granted for FY13 went up by 13%. The FY13 increase follows a 20% cut in incentive awards granted in FY12, but the increase highlights the importance for Barclays to maintain good cost flexibility. Net revenue in the investment bank increased by 2% qoq to GBP2.15bn in 4Q13 but fell by 17% yoy. Fixed income (FICC) net revenue grew 12% qoq (fell 16% yoy, also because of GBP111m lower income relating to a litigation matter), in contrast to many peers, which saw quarterly drops in FICC revenue, as better results at Barclays in rates, commodities and currencies outweighed lower revenue in credit products. Equity sales and trading net revenue dropped more sharply than at most peers, by 23% qoq, as market volumes declined, but the bank's performance for FY13 remained stronger than in the previous year. 4Q13 revenue from advisory and capital markets activities improved 12% qoq as the bank's equity underwriting activities improved. Pre-tax profit in Barclays' UK retail and business banking (RBB) reflected higher transformation costs and the UK bank levy, which caused in a 40% qoq drop in pre-tax income to GBP212m as net revenue remained broadly stable. Africa RBB pre-tax profit fell 55% qoq as net revenue fell and operating expenses increased. However, loan impairment charges more than halved yoy. Europe RBB continues to drag on profitability, reporting a GBP181m 4Q13 pre-tax loss after a GBP106m loss in 3Q13. Fitch expects the bank's UK RBB business will benefit from the improving economic environment, and increased business volumes should help income generation. The performance of the European business is likely to remain weak, but the bank is working on refocusing its activities in the region. Fitch expects that operations in South Africa through Absa Bank Limited, could be affected by the impact of market volatility on the country's economy, but this should remain manageable for the bank. Barclaycard's 4Q13 pre-tax profit declined 16% qoq to GBP335m because of the UK bank levy and transformation costs. Business volume growth over the year drove an increase in revenue, but 4Q13 loan impairment charges also increased 6% qoq. The corporate banking division saw improved FY13 performance, but 4Q13 pre-tax profit fell 55% qoq, driven by the UK bank levy and transformation costs, excluding which pre-tax profit would have fallen by 19% qoq. The group's wealth and investment management division reported an adjusted loss before tax of GBP73m for the quarter. Barclays' funding remained sound despite the GBP23bn decline in the group's liquidity pool throughout FY13 to GBP127bn at year-end. The composition of the liquidity pool also changed as cash and deposits with central banks included in the pool were reduced to GBP43bn (from GBP85bn at end-2012), while highly rated government bonds amounted to GBP62bn at end-2013. Barclays' estimated Basel III LCR stood at 102% at end-2013, and its NSFR at 110%. Fitch expects the bank to maintain sound liquidity, which benefits from the group's good deposit franchise, and total funding, excluding Absa, fell GBP18bn to GBP522bn at end-2013. About 62% of this funding was composed of customer deposits, and Barclays' loan/deposit ratio improved to 101% from 110% at end-2012. Contact: Christian Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN James Longsdon Managing Director +44 20 3530 1076 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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