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Investment Banking Loss Drags Barclays Earnings

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Barclays PLC (BCS - Free Report) reported adjusted net income of £3,152 million ($4,927 million) for 2013, down 42% from the prior year. The decrease was mainly due to a slump in investment banking income.

Results were adversely impacted by fall in net operating income and FICC revenues. However, these were partly offset by almost flat operating expenses. However, the performances of all segments except UK Retail and Banking Business, 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 £25,084 million ($39,206 million), down 4% from the 2012 level.

Additionally, adjusted profit before tax declined 32% from the year-ago period to £5,167 million ($8,076 million). The decrease was mainly due to costs incurred to achieve Transform and a fall in overall income.

However, statutory profit before tax improved substantially from the comparable period last year to £2,838 million ($4,436 million), driven by lower credit charge.

Operating expenses (excluding UK bank levy and costs to achieve Transform) totaled £18,180 million ($28,415 million), almost in line with the prior year. Cost to income ratio was 71% against 63% in the prior-year period.

Segment Details

UK Retail and Banking Business: Adjusted profit before tax came in at £1,195 million ($1,868 million), down 2% from the prior year. This excludes the provision for Payment Protection Insurance (PPI) redress of £660 million ($1,032 million).

Europe Retail and Banking Business: Loss before tax came in at £996 million ($1,557 million), deteriorating significantly from last year. The segment incurred a loss primarily due to costs arising from the endeavors to achieve Transform and a rise in other net expense.

Africa Retail and Banking Business: Profit before tax came was £404 million ($631 million), up 25% year over year. The rise was driven by lower credit impairment charges.

Barclaycard: Adjusted profit before tax came in at £1,507 million ($2,355 million), increasing 2% from the year-ago period.  The rise was attributable to growth in the US and UK card portfolios.

Investment Bank: Profit before tax fell 37% from the previous year to £2,523 million ($3,943 million). A 17% decline in fixed income, currency and commodities income (FICC) was the primary reason for the fall.

Corporate Banking: Adjusted profit before tax came in at £801 million ($1,252 million), up 74% from the prior year.

Wealth and Investment Management: Adjusted loss before tax was £19 million ($30 million) compared with profit before tax of £274 million ($434 million) in 2012. The decline was due to costs incurred to achieve Transform and customer remediation provision.

Head Office and Other Operations: Adjusted loss before tax was £248 million ($388 million), compared with adjusted profit before tax of £189 million ($300 million).

Balance Sheet and Capital Ratios

Total assets as of Dec 31, 2013 came in at £1,312 billion ($2,163 billion), down 12% year over year. The fall was mainly due to decrease in derivative assets, increase in forward interest rates and exposure reduction initiatives with central clearing parties, along with reduction in cash and balances at central banks.

As of Dec 31, 2013, Common Equity Tier (CET) 1 ratio was 9.3%, up from 8.4% as of Sep 30, 2013. The company remains on track to achieve CET target of 10.5% by 2015.

Total risk weighted assets fell 7% year over year to £436 billion ($719 billion) as of Dec 31, 2013.

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 Dec 31, 2013, the company’s PRA leverage ratio was nearly 3.0%.

Updates on ‘Transform’ Program

In 2013, Barclays announced a strategic cost management program – Transform – targeted at lowering net operating expense by £1.7 billion to reach £16.8 billion by 2015. The initiative is being executed and managed through rightsizing, industrialization and innovation measures. Of the total expected costs of £2.7 billion pertaining to Transform, £1,209 million ($1,890 million) has already been incurred by the company.

Performance of Other Foreign Banks

HDFC Bank Ltd. (HDB - Free Report) reported fiscal third-quarter 2014 (ended Dec 31) net profit of INR23.26 billion ($0.38 billion), up 25.1% from the prior-year quarter. The increase in the top line was partially offset by higher operating expenses. Moreover, deposit and loan balances as well as credit quality showed improvement.

Impacted by huge litigation costs, Deutsche Bank AG (DB - Free Report) reported net loss of €965 million ($1.3 billion) in the fourth quarter of 2013 as compared with a loss of €2.5 billion ($3.4 million) in the prior-year quarter. Lower revenues and higher provision for credit losses were partially offset by decrease in expenses.

HSBC Holdings plc (HSBC - Free Report) is scheduled to announce fourth quarter and full-year 2013 results on Feb 24.

Our Viewpoint

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

However, possible litigation headwinds arising from investigation of regulatory authorities is a plausible concern. Further, slow revenue growth, tepid economic recovery and a stringent regulatory landscape will continue to weigh on the company’s performance in the near term.

Barclays currently carries a Zacks Rank #2 (Buy).

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