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Fitch: Delivery on New Strategy Key to Addressing Barclays' 1H14 Earnings Weakness
July 30, 2014 / 6:32 PM / 3 years ago

Fitch: Delivery on New Strategy Key to Addressing Barclays' 1H14 Earnings Weakness

(The following statement was released by the rating agency) LONDON, July 30 (Fitch) Fitch Ratings notes that Barclays Plc's (Barclays, A/Stable/a) profitability was again weak in 1H14, with reported ROE of just 4% on a statutory basis. Profitability was heavily affected by a further GBP900m of payment protection insurance (PPI) charges taken in 2Q14, by continuing earnings challenges in the investment bank, where earnings fell by 46% versus 1H13 on the back of a 22% decline in markets (credit, equities and macro) income, and by further (albeit lower) losses in the non-core unit. The non-core unit was a key feature of the bank's new strategy announced in May and is predominantly made up of European retail banking and certain portfolios and exposures no longer deemed core to the investment bank. The results have no immediate effect on Barclays' ratings. However, steady progress was made on strengthening capitalisation and running down the 'non-core' balance sheet, while asset quality and liquidity remain sound. Excluding PPI charges, profitability in the core 'personal and corporate banking' (mainly UK) and Barclaycard (credit card) units both showed momentum (profit before tax (PBT) up 23% and 24%, respectively) on the back of some income growth and further cost savings and are units that can achieve appropriate returns over a cycle. Compared with 2Q13 the bank saw PBT decline 50% to GBP567m for 2Q14. Total revenue decreased 16% in 2Q14 the majority of which was due to fair value adjustments for the 2008 US Lehman acquisition in 2Q13 and adverse currency movements in 2Q14. Investment banking fee income increased by 35%, but markets income was down 16% while operating expenses increased 12% due to transformation costs and increased litigation and conduct charges. Overall, the results continue to illustrate the importance to the bank of normalising the performance of its core investment banking division (where ROAE was less than 6%) while managing down its loss-making non-core division and sustaining the sound performance of its personal and corporate banking and Barclaycard activities. Both African banking and the investment bank segments were notably negatively affected in 1H14 by adverse currency movements. The increase in PPI provisions, above expectations and against recent trends in respect of claims rates arising from post-2005 policies, was the main exceptional item affecting the bank's 1H14 performance. The increase was driven by an increased number of costly historical pre-2005 claims. As is the case for a number of its global peers, Barclays remains susceptible to ongoing litigation, conduct and regulatory risk on many fronts. Despite the weak performance, the bank increased its fully loaded common equity Tier 1 (CET1) ratio in 2Q14 to 9.9% from a restated 9.1% at end-2013. On this basis, Barclays is marginally below the average compared with its global trading and universal bank peers but is narrowing the gap. The improvement was mainly driven by a reduction in RWAs as the bank only retained GBP0.5bn of earnings in 1H14 after dividend payments. Non-core RWAs declined by GBP22bn due to trading asset sales and maturity run-off, but the bank also benefited from a change in the way it risk weights high quality liquidity portfolio assets in its 'Head Office' division, where RWAs fell by GBP8.6bn in 1H14. The benefit of the latter was offset by a GBP9bn increase in RWAs due to model updates. The bank has maintained its target of exceeding 11% CET1 ratio by 2016, which Fitch believes should be achievable unless it incurs particularly material litigation/conduct charges in the meantime. The bank's Prudential Regulation Authority (PRA) -adjusted leverage ratio and Basel III leverage ratio also improved to 3.4% (3.0% end-2013) against a greater than 4% target for 2016. The improvement was due to a GBP99bn reduction in PRA leverage exposure and a GBP2.3bn increase in adjusted Tier 1 capital following the bank's Tier 1 exchange. Barclays also improved its liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) to 107% and 98%, respectively (2013: 96% , 95%), with the groups liquidity pool increasing by GBP7bn to GBP134bn while the loans to deposits ratio declined marginally to 100%. The investment bank's performance in 1H14 continued to struggle, mainly due to the challenging environment facing its markets business. This remains a key issue for the bank. Fees from the banking functions (eg, M&A, debt capital markets (DCM, equity capital markets) showed a positive 10% growth versus H113. However, the weak markets and in particular macro performance saw net trading income, the largest component of investment banking revenue, fall 33% yoy. This contrasts with Barclays' European global trading and universal bank peers that have reported so far, where yoy decline in 2Q14 core FICC revenue was more contained, although the very strong 1Q13 performances meant that 1H14 as a whole was generally down. US investment banking activity was also affected by currency movement. Overall investment banking net operating income declined 19%. Increased transformation costs maintained the cost base resulting in a 46% decline in PBT or 67% decline in bottom line profitability versus 1H13. Accordingly ROAE remains weak relative to longer term targets and the unit's cost income ratio of 76% remains elevated. Personal and corporate banking performance remains robust and showed some improvement, recording annualised growth of 4% and the cost to income ratio has declined to 61%. However, this is still below the level that Fitch views as achievable for a UK retail and corporate bank, but represents reasonable progress. The bank's headline ratios for its mortgage portfolio remain sound, with a LICs ratio of 21bps for 1H14. Average LTV ratios for the total book declined to 55% while average new business was written at 64% LTV ratios in line with 2013. PBT for 2Q14 increased 13% to GBP780m compared to 1Q14 due to lower impairment charges and operating expenses. Barclaycard's performance also remained sound, with 10% growth in balances as the bank has increased promotional activities. As a result of promotions and US currency effects, profitability failed to match the growth in balances. Barclaycard also recorded lower cost to income, lower LICs and improved ROAE and ROAA and continues to generate robust profits. PBT for 2Q14 increased 8% to GBP396m mainly due to volume growth. Africa Banking on a constant currency basis recorded solid PBT growth of 13%. However, a 25% devaluation of the South African rand caused an 18% decline in bottom line profit. PBT in 2Q14 of GBP244m was marginally ahead of 1Q14's GBP240m. Impairment charges reduced by 33% with loan impairment charges to gross loans (LIC ratio) of 45bps which we view as a solid result and within expectations at this point of the cycle. Contact: James Longsdon Managing Director +44 20 3530 1076 Fitch Ratings Limited 30 North Colonnade London E14 5GN Alan Milne Associate Director +44 20 3530 1491 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com Related Research: Peer Review: Global Trading and Universal Banks (March 2014) Applicable Criteria and Related Research: Peer Review: Global Trading and Universal Banks here 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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