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Slow Fixed Income Trading Hits Barclays Earnings

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Barclays PLC (BCS - Free Report) reported adjusted net income of £1,132 million ($1,873 million) for first quarter 2014, down 7% from the prior-year quarter. The fall was primarily due to the slump in investment banking income as the company continued to face tough trading conditions leading to lower client activities.

Results were adversely impacted by fall in net operating income reflecting lower fixed income, currency and commodities (FICC) income. However, this was partly offset by lower operating expenses.

Notably, the performances of all segments except Investment Bank, Wealth and Investment Management and Head Office and Other Operations were impressive. Capital ratios too remained strong.

Performance in Detail

Net operating income was £6,102 million ($10,098 million), down 13% year over year.

Additionally, adjusted profit before tax declined 5% from the year-ago period to £1,693 million ($2,802 million). The fall was mainly the result of a reduction in Investment Bank income. However, statutory profit before tax improved 18% from the prior-year comparable period to £1,812 million ($2,298 million), driven by a credit gain.

Operating expenses (excluding UK bank levy and costs to achieve Transform) totaled £4,195 million ($6,942 million), down 12% year over year. Cost to income ratio was 67% against 68% in the prior-year period.

Segment Details

UK Retail and Banking Business: Adjusted profit before tax came in at £360 million ($596 million), up 20% from the prior-year quarter. The rise was attributable to growth in net operating income and lower credit impairment charges.

Europe Retail and Banking Business: Loss before tax came in at £88 million ($146 million), rising 81% from a loss of £462 million ($718 million) in the year-ago quarter. Lower loss was mainly due to non-recurrence of costs to achieve Transform, cost savings resulting from 2013 Transform initiatives and fall in credit impairment charges.

Africa Retail and Banking Business: Profit before tax came in at £101 million ($167 million), up 25% year over year. The rise was driven by lower credit impairment charges.

Barclaycard: Adjusted profit before tax came in at £423 million ($700 million), increasing 17% from the year-ago period.  The rise was attributable to continued net lending growth and improved efficiency.

Investment Bank: Profit before tax fell 49% from the preceding-year period to £668 million ($1,105 million). A 41% decline in FICC income was the primary reason for the fall.

Corporate Banking: Adjusted profit before tax came in at £260 million ($430 million), up 42% from the prior year.  The rise largely reflected lower operating expenses and an improved impairment.

Wealth and Investment Management: Adjusted profit before tax was £51 million ($84 million), down 15% year over year. The decline was mainly due to costs incurred to achieve Transform.

Head Office and Other Operations: Adjusted loss before tax was £82 million ($136 million), deteriorating significantly from the prior-year quarter.

Balance Sheet and Capital Ratios

Total assets as of Mar 31, 2014 came in at £1,362 billion ($2,069 billion), almost in line with the prior-year level. As of Mar 31, 2014, Common Equity Tier (CET) 1 ratio was 9.6%, slightly up from 9.3% as of Dec 31, 2013. The company remains on track to achieve the CET target of 10.5% by 2015.

Total risk-weighted assets fell £6 from the prior quarter to £429 billion ($652 billion) as of Mar 31, 2014. The decline was mainly caused by Investment Bank 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 Mar 31, 2014, the company’s estimated PRA leverage ratio was 3.1%.

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 in 2013. Further, in the first quarter, Barclays incurred £240 million ($397 million) of costs, largely associated with reducing the scale of activities and redundancies in the Investment Bank and UK RBB as well as investment in technology and process improvements.

Our Viewpoint

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

However, possible litigation headwinds arising from investigation of regulatory authorities is a plausible concern. In addition, 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 #5 (Strong Buy).

Performance of Other Foreign Banks

The Royal Bank of Scotland Group plc’s (RBS - Free Report) first quarter 2014 profit from continuing operations came in at £1.28 billion ($2.12 billion), rising more than twofold from £476 million ($739.4 million) in the prior-year quarter. Results benefited from lower loan impairment losses and reduced operating expenses. Additionally, the results reflected higher net interest income. However, reduced non-interest income was a negative.

Impacted by a disappointing top line performance, Deutsche Bank AG (DB - Free Report) reported net income of €1.1 billion ($1.5 billion) in the first quarter of 2014, down from €1.7 billion ($2.2 million) in the prior-year quarter. However, decreased expenses, lower provision for credit losses and a strong capital position were the positives.

HSBC Holdings plc (HSBC - Free Report) is scheduled to announce first quarter results on May 7.

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