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Barclays PLC (BCS - Analyst Report) reported net operating income of £5,757 million ($9,243 million) for fourth quarter 2012 (ended Dec 2012). This reflects a decline of 4.8% on a sequential basis.

Huge statutory losses were the primary reason behind the poor quarterly performance, partly offset by marginally lower operating expenses. However, performances of few segments – Wealth and Investment Management and Africa Retail and Banking Business – were credible. Further, capital ratios were strong in the quarter.

For 2012, net operating income was £25,447 million ($40,326 million), up 3% year over year.

Performance in Detail

Adjusted profit before tax plunged 36.7% on a sequential basis to £1,094 million ($1,756 million). The fall was mainly driven by lower levels of net operating income, partially offset by higher other income.

However, statutory loss after tax in the reported quarter stood at £466 million ($748 million) compared with £47 million ($1,949 million) in the last quarter. The upsurge was mainly attributable to adjustments for provisions for interest rate hedging products redress and Payment Protection Insurance (PPI) redress as well as own credit.

Operating expenses (excluding UK bank levy) for the quarter totaled £4,362 million ($7,004 million), marginally down 0.5% from the prior quarter. Cost to income ratio stood at 93% as against 87% in the previous quarter.

Business Overview

UK Retail and Banking Business: Adjusted profit before tax for the quarter came in at £326 million ($523 million), down 18.5% from the prior quarter. As of Dec 31, 2012, loans and advances to customers were £128.2 billion ($207 billion), up 5.8% year over year. Likewise, customer deposits grew 3.8% to £116.0 billion ($187 billion).

Europe Retail and Banking Business: Loss before tax for the quarter came in at £88 million ($141 million), up 49.2% from the last quarter. As of Dec 31, 2012, loans and advances to customers came in at £40.0 billion ($65 billion), down 8.3% from the year-ago period. Yet, customer deposits increased 7.3% to £17.6 billion ($28 billion).

Africa Retail and Banking Business: Profit before tax for the quarter came in at £138 million ($222 million), increasing significantly from the previous quarter. Loans and advances to customers stood at £31.7 billion ($51 billion) as of Dec 31, 2012, down 7.8% year over year. Similarly, customer deposits dipped 2.7% to £22.0 billion ($36 billion).

Barclaycard: Adjusted profit before tax for the quarter came in at £356 million ($572 million), down 10.3% from the last quarter. As of Dec 31, 2012, loans and advances to customers were £32.9 billion ($53 billion), climbing 9.3% year over year. Customer deposits jumped substantially to £2.8 billion ($5 billion).

Investment Bank: Adjusted profit before tax decreased 8.4% sequentially to £858 million ($1,378 million). As of Dec 31, 2012, loans and advances to customers were £145.0 billion ($234 billion), plummeting 8.6% year over year. Customer deposits also declined 8.3% to £76.2 billion ($123 billion).

Corporate Banking: Adjusted profit before tax for the quarter came in at £107 million ($172 million), declining 9.2% from the previous quarter. Loans and advances to customers stood at £62.9 billion ($102 billion) as of Dec 31, 2012, down 6.0% year over year. However, customer deposits surged 14.0% to £97.1 billion ($157 billion).

Wealth and Investment Management: Profit before tax for the quarter came in at £115 million ($185 million), surging 45.5% from the prior quarter. As of Dec 31, 2012, loans and advances to customers stood at £21.2 billion ($34 billion), rising 12.8% from the year-ago period. Moreover, customer deposits surged 15.7% to £53.8 billion ($87 billion).

Head Office and Other Operations: Adjusted loss before tax deteriorated significantly on a sequential basis to £718 million ($1,153 million).

Balance Sheet and Capital Ratios

Total assets as of Dec 31, 2012 came in at £1,490 billion ($2,407 billion), down 4.7% from £1,563 billion ($2,415 billion) as of Dec 31, 2011. Total shareholders’ equity came in at £63 billion ($102 billion), declining 3.4% year over year.

As of Dec 31, 2012, core tier 1 ratio stood at 10.9% as against 11.0% as of Dec 31, 2011. Total risk weighted assets came in at £387 billion ($599 billion), down 1.0% year over year.

Strategic Review

Concurrent with the earnings release, Barclays announced the results of its strategic review. The company seeks to lower workforce by approximately 3,700 by the end of this year. This is anticipated to lead to one time restructuring expense of about £500 million in the first quarter of 2013.

Further, Barclays intends to reduce its total operating expenses by £1.7 billion to £16.8 billion in 2015. This will enable the company to achieve cost to income ratio in the mid- 50s in 2015. Moreover from 2014, the company is targeting a dividend payout ratio of 30% in the years to come.

Our Viewpoint

Going forward, we expect Barclays’ diversified business model and sound financial position to keep contributing to its overall growth in the future. Further, steady capital deployment activities will continue to reinforce investors’ confidence in the stock.

The possible litigation headwinds, arising from investigation of regulatory authorities, draw our concern. We are also concerned about the increasing competition, volatility in the global economy and effects of the deepening Euro-Zone crisis.

Barclays currently retain a Zacks Rank #4 (Sell). However, among other foreign banks, Bank of Montreal (BMO - Snapshot Report), Shinhan Financial Group Company Limited (SHG) and BBVA Banco Franc (BFR - Snapshot Report) carry a Zacks Rank #1 (Strong Buy) and are worth considering.

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