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Barclays (BCS) Q2 Earnings Fall; Asset Sale Hurts Revenues
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Barclays PLC’s (BCS - Free Report) second-quarter 2016 net income from continuing operations was £803 million ($1.15 billion), down 34% from the year-ago quarter. Also, pre-tax earnings of £1.27 billion ($1.82 billion) declined 18% year over year, given a tough industry backdrop and sale of several non-core operations.
A challenging industry backdrop had adverse impact on Barclays’ trading revenue. This along with dismal investment banking performance and disposal of assets were the primary reasons for the decline in revenue, which was partially offset by a stable net interest income. Further, a rise in credit impairment charges was an undermining factor. However, decline in operating expenses continued to act as a tailwind.
Notably, in the pre-market trading, Barclays surged more than 8% on NYSE. Perhaps, the success of streamlining efforts and lesser impact of Brexit on the company’s financials drove the price up. The actual picture will emerge after the full day’s trading session once investors and analysts go through the core results.
Attributable profit for the quarter was £677 million ($971.2 million), down 41% from the prior-year quarter.
Lower Expense Base Supported Results
Net operating income was £5.48 billion ($7.86 billion), down 10% year over year.
Total operating expenses totaled £3.87 billion ($5.55 billion), down 14% from the year-ago quarter. This reflected an absence of several notable items recorded in the prior-year quarter, partly offset by higher restructuring charges and implementation costs associated with the structural reform plan.
Owing to its restructuring plan, management reiterated its operating expense (excluding conduct and litigation and other notable items) in 2016 for the Core division to be £12.8 billion. Further, the company expects non-core operating expenses to be £400–£500 million in 2017.
Cost to income ratio was 65%, down from 69% in the year-ago period.
Segmental Performance Reflects Strength
Barclays UK: Profit before tax came in at £376 million ($539.4 million), a significant improvement from a pre-tax loss of £132 million in the year-ago quarter. The rise was driven by improvement in net operating income and lower operating expenses, partially offset by a rise in credit impairment charges.
Barclays Corporate & International: Profit before tax came in at £1.73 million ($2.48 billion), down 8% from the prior-year quarter. The decline was due to marginally higher operating expenses and credit impairment charges as well as decrease in net operating income.
Head Office: Profit before tax was £257 million ($368.7 million), up 6% from the prior-year period.
Barclays Non-Core: Loss before tax amounted to £1.09 billion ($1.56 billion), deteriorating from a loss of £435 million incurred in the year-ago period.
Strong Balance Sheet and Capital Ratios
Total assets as of Jun 30, 2016 came in at £1,351.3 billion ($1,810.1 billion), up 8% from the Mar 31, 2016 level. As of Jun 30, 2016, Common Equity Tier (“CET”) 1 ratio was 11.6%.
Total risk-weighted assets were £366.3 billion ($490.7 billion) as of Jun 30, 2016.
Our Take
We expect Barclays’ diversified business model and sound financial position to consistently support its overall growth in the future. Further, the bank’s expense reduction as well as restructuring initiatives is expected to improve profitability over the long term.
However, we believe litigation headwinds from regulatory investigations will remain a matter of concern. In addition, muted revenue growth, tepid global economic recovery and a stringent regulatory landscape will continue to weigh on the company’s near-term performance.
Barclays currently carries a Zacks Rank #5 (Strong Sell).
Other Foreign Banks
Deutsche Bank AG (DB - Free Report) reported net income of €20 million ($22.6 million) in the second quarter of 2016, significantly down on a year-over-year basis. Income before taxes came in at €408 million ($460.7 million), down 66.8% year over year. Lower revenues and higher provisions negatively impacted the results. However, the reduction in non-interest expenses was a positive factor.
UBS Group AG (UBS - Free Report) reported second-quarter 2016 net profit attributable to shareholders of CHF 1.03 billion ($1.06 million), down 14% year over year. The results were impacted by a 22% year-over-year decrease in net interest income and a 7% drop in net fee and commission income, partially offset by a 15% increase in net trading income.
HSBC Holdings plc (HSBC - Free Report) is slated to report on Aug 3.
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Barclays (BCS) Q2 Earnings Fall; Asset Sale Hurts Revenues
Barclays PLC’s (BCS - Free Report) second-quarter 2016 net income from continuing operations was £803 million ($1.15 billion), down 34% from the year-ago quarter. Also, pre-tax earnings of £1.27 billion ($1.82 billion) declined 18% year over year, given a tough industry backdrop and sale of several non-core operations.
A challenging industry backdrop had adverse impact on Barclays’ trading revenue. This along with dismal investment banking performance and disposal of assets were the primary reasons for the decline in revenue, which was partially offset by a stable net interest income. Further, a rise in credit impairment charges was an undermining factor. However, decline in operating expenses continued to act as a tailwind.
Notably, in the pre-market trading, Barclays surged more than 8% on NYSE. Perhaps, the success of streamlining efforts and lesser impact of Brexit on the company’s financials drove the price up. The actual picture will emerge after the full day’s trading session once investors and analysts go through the core results.
Attributable profit for the quarter was £677 million ($971.2 million), down 41% from the prior-year quarter.
Lower Expense Base Supported Results
Net operating income was £5.48 billion ($7.86 billion), down 10% year over year.
Total operating expenses totaled £3.87 billion ($5.55 billion), down 14% from the year-ago quarter. This reflected an absence of several notable items recorded in the prior-year quarter, partly offset by higher restructuring charges and implementation costs associated with the structural reform plan.
Owing to its restructuring plan, management reiterated its operating expense (excluding conduct and litigation and other notable items) in 2016 for the Core division to be £12.8 billion. Further, the company expects non-core operating expenses to be £400–£500 million in 2017.
Cost to income ratio was 65%, down from 69% in the year-ago period.
Segmental Performance Reflects Strength
Barclays UK: Profit before tax came in at £376 million ($539.4 million), a significant improvement from a pre-tax loss of £132 million in the year-ago quarter. The rise was driven by improvement in net operating income and lower operating expenses, partially offset by a rise in credit impairment charges.
Barclays Corporate & International: Profit before tax came in at £1.73 million ($2.48 billion), down 8% from the prior-year quarter. The decline was due to marginally higher operating expenses and credit impairment charges as well as decrease in net operating income.
Head Office: Profit before tax was £257 million ($368.7 million), up 6% from the prior-year period.
Barclays Non-Core: Loss before tax amounted to £1.09 billion ($1.56 billion), deteriorating from a loss of £435 million incurred in the year-ago period.
Strong Balance Sheet and Capital Ratios
Total assets as of Jun 30, 2016 came in at £1,351.3 billion ($1,810.1 billion), up 8% from the Mar 31, 2016 level. As of Jun 30, 2016, Common Equity Tier (“CET”) 1 ratio was 11.6%.
Total risk-weighted assets were £366.3 billion ($490.7 billion) as of Jun 30, 2016.
Our Take
We expect Barclays’ diversified business model and sound financial position to consistently support its overall growth in the future. Further, the bank’s expense reduction as well as restructuring initiatives is expected to improve profitability over the long term.
However, we believe litigation headwinds from regulatory investigations will remain a matter of concern. In addition, muted revenue growth, tepid global economic recovery and a stringent regulatory landscape will continue to weigh on the company’s near-term performance.
Barclays currently carries a Zacks Rank #5 (Strong Sell).
Other Foreign Banks
Deutsche Bank AG (DB - Free Report) reported net income of €20 million ($22.6 million) in the second quarter of 2016, significantly down on a year-over-year basis. Income before taxes came in at €408 million ($460.7 million), down 66.8% year over year. Lower revenues and higher provisions negatively impacted the results. However, the reduction in non-interest expenses was a positive factor.
UBS Group AG (UBS - Free Report) reported second-quarter 2016 net profit attributable to shareholders of CHF 1.03 billion ($1.06 million), down 14% year over year. The results were impacted by a 22% year-over-year decrease in net interest income and a 7% drop in net fee and commission income, partially offset by a 15% increase in net trading income.
HSBC Holdings plc (HSBC - Free Report) is slated to report on Aug 3.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>