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Robust 1H Earnings for Barclays

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Barclays PLC (BCS - Free Report) reported earnings of 5.2 pence per share for first half of 2013. This reflects a substantial improvement from 1.2 pence in the prior-year period.

Results benefited from a decline in operating expenses, partially offset by lower net operating income. Moreover, the performances of segments such as the UK Retail and Banking Business, Africa Retail and Banking Business, Barclaycard, Investment Bank and Corporate Banking were impressive. Capital ratios were also strong.

Performance in Detail

Net operating income was £13,440 million ($20,757 million) for the first six months of 2013. This reflects a 2% drop from the prior-year period amount.

Adjusted profit before tax plunged 17% from the year-ago period to £3,591 million ($5,546 million). The fall was mainly due to costs incurred to achieve Transform. However, statutory profit after tax jumped 94% from the comparable period last year to £1,083 million ($1,673 million).

Operating expenses (excluding costs to achieve Transform) totaled £9,141 million ($14,117 million), down 4% from the year-ago period. Cost to income ratio was 65% against 61% in the prior-year period.

Business Overview

UK Retail and Banking Business: Adjusted profit before tax came in at £632 million ($976 million), up 7% from the prior-year period. This excludes the provision for Payment Protection Insurance (PPI) redress of £660 million ($1,019 million). In Mar 2013, the company acquired ING Direct UK from ING Groep NV (ING - Free Report) .

Europe Retail and Banking Business: Loss before tax came in at £709 million ($1,095 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 £212 million ($327 million), up 16% from the comparable period last year.

Barclaycard: Adjusted profit before tax came in at £775 million ($1,197 million), up 3% from the year-ago period, driven by the U.S. and U.K. card portfolios.

Investment Bank: Profit before tax increased 7% from the comparable period last year to £2,389 million ($3,690 million).

Corporate Banking: Adjusted profit before tax came in at £402 million ($621 million), rising 29% from the prior-year period.

Wealth and Investment Management: Adjusted profit before tax came in at £47 million ($73 million), decreasing 53% from the prior-year period. The decline was due to costs incurred to achieve Transform, customer remediation provision and increased credit impairment charges.

Head Office and Other Operations: Adjusted loss before tax was £157 million ($242 million), compared with adjusted profit before tax of £309 million ($487 million).

Balance Sheet and Capital Ratios

Total assets as of Jun 30, 2013 came in at £1,533 billion ($2,394 billion), up 3% from the prior-year period. The improvement principally reflected increases in reverse repurchase agreements and other similar secured lending, loans and advances to customers and available for sale investments, partly offset by a decrease in derivative assets.

As of Jun 30, 2013, core tier 1 ratio was 11.1% as against 10.7% as of Jun 30, 2012. Total risk weighted assets were almost stable at £387 billion ($604 billion), driven by business activity risk reductions.

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 initiatives.

In the first half of 2013, Transform focused primarily on rightsizing. Management expects the initiative to shift towards industrialization and innovation in the second half of 2013 and in 2014. Further, a part of the total expected £2.7 billion of costs to achieve Transform is being accelerated in 2013, after having already recognized £640 million ($988 million) in the first half.

Leverage Plan

As a consequence of the Prudential Regulation Authority (PRA) review, Barclays intends to modify its capital plans, in order to meet the 3% PRA leverage ratio target by Jun 2014. As of Jun 30, 2013, the company’s PRA leverage ratio was 2.2%, representing a deficit of £12.8 billion.

Along with the earnings release, Barclays announced its ‘Leverage Plan’. The plan is a combination of a rights issue worth approximately £5.8 billion (net of expenses); lower leverage exposure by £65–80 billion to nearly £1.5 trillion; issuance of additional Tier 1 securities of up to £2 billion; and the retention of earnings and other forms of capital accretion.

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 #3 (Hold). Better performing foreign banks include Mitsubishi UFJ Financial Group, Inc. and BBVA Banco Franc (BFR - Free Report) . Both these stocks carry a Zacks Rank #1 (Strong Buy).

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