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Barclays Earnings Hit by Lower Investment Banking Income

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Barclays PLC (BCS - Free Report) reported adjusted net income of £1,760 million ($2,911 million) for first half of 2014, down 14% from the prior-year period. The fall was primarily due to slump in investment banking income as the company continued to face tough trading conditions leading to lower client activities.

Results were adversely impacted by a 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 and Africa Banking were impressive. Capital ratios too remained strong.

Half Yearly Performance

Adjusted net operating income was £12,246 million ($20,257 million), down 9% year over year.

Additionally, adjusted profit before tax fell 7% from the year-ago period to £3,349 million ($5,540 million). The decrease was mainly due to a reduction in Investment Bank income, partially offset by improvements in Personal and Corporate Banking, and Barclaycard. Notably, statutory profit before tax rose 49% from the year-ago comparable period to £2,501 million ($4,137 million).

Operating expenses (excluding litigation and conduct charges and Transform-related costs) totaled £8,172 million ($13,518 million), down 9% year over year. Cost to income ratio was 67% against 65% in the prior-year period.

Segment Details on Half Yearly Basis

Personal and Corporate Banking: Profit before tax came in at £1,468 million ($2,428 million), up 23% from the prior-year period. The rise was attributable to growth in net operating income, lower operating expenses and a fall in credit-impairment charges.

Barclaycard: Profit before tax came in at £764 million ($1,264 million), increasing 24% from the year-ago period.  The rise was driven by continued net lending growth and improved efficiency.

Africa Banking: Profit before tax came in at £484 million ($801 million), down 12% from the prior year.  The fall largely reflected lower net operating income.

Investment Bank: Profit before tax dropped 46% from the year-ago period to £1,058 million ($1,750 million). A 78% decline in net investment income was the primary reason behind the fall.

Head Office and Other Operations: Profit before tax was £66 million ($109 million), compared with loss before tax of £47 million ($73 million) in the prior-year period.

Barclays Non-Core: Loss before tax was £491 million ($812 million), improving from a loss of £673 million ($1,039 million) in the year-ago period.

Balance Sheet and Capital Ratios

Total assets as of Jun 30, 2014 came in at £1,315 billion ($2,239 billion), down 2% from Dec 31, 2013 level. As of Jun 30, 2014, Common Equity Tier (CET) 1 ratio was 9.9%, up from 9.1% 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 £31billion from the beginning of the year to £411 billion ($700 billion) as of Jun 30, 2014. The decline was mainly caused by Investment Bank and Barclays Non Core risk reductions.

Further, the Prudential Regulation Authority (PRA) leverage ratio was 3.4% as of Jun 30, 2014.

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 cost of £2.7 billion pertaining to Transform, £1.2 billion ($1,890 million) has already been incurred by Barclays in 2013. £494 million ($817 million) was further incurred by the company in the first six months of 2014.

Our Viewpoint

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

However, possible litigation headwind arising from investigations by 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 #3 (Hold).

Performance of Other Foreign Banks

The Royal Bank of Scotland Group plc’s (RBS - Free Report) first-half 2014 profit from continuing operations came in at £1.92 billion ($3.20 billion), rising more than twofold from £696 million ($1,074.9 million) in the prior-year comparable period. Results were driven by lower loan impairment losses, higher net interest income and reduced operating expenses. However, lower non-interest income was on the downside.

UBS AG (UBS - Free Report) reported second-quarter 2014 net income attributable to shareholders of CHF 792 million ($890.8 million), comparing favorably with the prior-year quarter earnings of CHF 690 million ($731.8 million). Results were attributable to prudent expense management.

Impacted by a disappointing top-line performance, Deutsche Bank AG (DB - Free Report) reported net income of €238 million ($326.4 million) in the second quarter of 2014, down from €335 million ($437.4 million) in the prior-year quarter. However, decreased expenses, lower provision for credit losses and a strong capital position were the positives.

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