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Barclays PLC (BCS - Analyst Report) reported adjusted net income of £3,418 million ($5,285 million) for first nine months of 2013. This reflected 21% decline from the prior-year period level.

Results were adversely impacted by fall in net operating income, partially benefiting from a decline in operating expenses. However, the performances of all segments except Europe Retail and Banking Business, Investment Bank and Wealth and Investment Management were impressive. Further, capital ratios remained strong.

Performance in Detail

Net operating income was £19,163 million ($29,628 million) for the first nine months of 2013. This reflected a fall of 4% from the prior-year period figure.

Adjusted profit before tax declined 20% from the year-ago period to £4,976 million ($7,693 million). The fall was mainly due to costs incurred to achieve Transform and fall in investment bank fixed income, currency and commodities income (FICC).

However, statutory profit after tax improved substantially from the comparable period last year to £2,851 million ($4,408 million), driven by lower credit charge.

Operating expenses (excluding costs to achieve Transform) totaled £13,403 million ($20,722 million), decreasing 3% from the year-ago period. Cost to income ratio was 66% against 62% in the prior-year period.

Business Overview

UK Retail and Banking Business: Adjusted profit before tax came in at £983 million ($1,520 million), up 3% from the prior-year period. This excludes the provision for Payment Protection Insurance (PPI) redress of £660 million ($1,020 million).

Europe Retail and Banking Business: Loss before tax came in at £815 million ($1,260 million), deteriorating significantly from the last-year period. The segment incurred a loss primarily due to costs incurred to achieve Transform and a rise in other net expenses.

Africa Retail and Banking Business: Profit before tax came in at £344 million ($532 million), up 59% from the comparable period last year.

Barclaycard: Adjusted profit before tax came in at £1,172 million ($1,812 million), increasing 2% from the year-ago period.

Investment Bank: Profit before tax decreased 12% from the comparable period last year to £2,852 million ($3,690 million).

Corporate Banking: Adjusted profit before tax came in at £678 million ($1,048 million), rising 70% from the prior-year period.

Wealth and Investment Management: Adjusted profit before tax came in at £54 million ($83 million), down 68% from the prior-year period. The decline was due to costs incurred to achieve Transform, customer remediation provision and higher credit impairment charges.

Head Office and Other Operations: Adjusted loss before tax was £292 million ($451 million), compared with adjusted profit before tax of £321 million ($506 million).

Balance Sheet and Capital Ratios

Total assets as of Sep 30, 2013 came in at £1,405 billion ($2,267 billion), declining from £1,533 billion ($2,394 billion) as of Jun 30, 2013. The fall was primarily due to decrease in the mark to market value of derivative financial instruments, settlement balances, reverse repurchase agreements and other similar secured lending, cash and balances at central banks, as well as reduction in Exit Quadrant Assets.

As of Sep 30, 2013, core Tier 1 ratio was 11.3%, up from 11.1% as of Jun 30, 2013. Total risk weighted assets fell from £387 billion ($604 billion) as of Jun 30, 2013 to £371 billion ($599 billion) as of Sep 30, 2013, driven by business activity risk reductions.

Further, following the Prudential Regulation Authority (PRA) review, Barclays intends to modify its capital plans in order to meet the PRA leverage ratio target of 3% by Jun 2014. As of Sep 30, 2013, the company’s PRA leverage ratio was 2.2%.

Updates on ‘Transform’ Program

In Feb 2013, Barclays announced a strategic cost management program – Transform – targeted at lowering net operating expense by £1.7 billion to £16.8 billion by 2015. The initiative is being executed and managed through rightsizing, industrialization and innovation measures.

In the first nine months of 2013, Transform focused mainly on rightsizing. Management expects the initiative to shift towards industrialization and innovation going forward. Further, of the total expected costs of £2.7 billion pertaining to Transform, £741 million ($988 million) has already been incurred by the company in the first nine months of 2013.  

Our Viewpoint

We expect Barclays’ diversified business model and sound financial position to consistently contribute to its overall growth in the future. Further, the expense savings initiatives and the latest Leverage Plan are expected to boost investors’ confidence in the stock.

However, possible litigation headwinds arising from investigation of regulatory authorities is a plausible concern. We are also anxious about the increasing competition, volatility in the global economy and effects of the deepening eurozone crisis.

Barclays currently carries a Zacks Rank #5 (Strong Sell). Better-performing foreign banks include Credit Suisse Group AG (CS - Snapshot Report), Deutsche Bank AG (DB - Analyst Report) and Westpac Banking Corporation (WBK). All of these have a Zacks Rank #1 (Strong Buy).

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