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Additional Provisions Curb Barclays' (BCS) Q1 Earnings

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Barclays PLC’s (BCS - Free Report) adjusted net income attributable to shareholders came in at £1.1 billion ($2.0 billion) for first-quarter 2015, up 20% year over year. The bottom line was mainly driven by curtailment in non-core assets and improvement in Investment Banking segment.

Notably, Barclays created a provision of £800 million ($1,212 million) related to the on-going investigation regarding the alleged manipulation of foreign exchange rates. Apart from this, results included an additional provision of £150 million ($227 million) to cover the payout over payment protection insurance (“PPI”) redress, £429 million ($650 million) of gain recognized as a component of the defined retirement benefit liability and a loss of £118 million ($179 million) related to the Spanish business sale.

At the time of writing this article, ADRs of Barclays declined nearly 1% in pre-market trading, reflecting investors’ disappointment over continuously rising legal provisions. Notably, the price reaction during the full trading session will give a better idea regarding investors’ reaction to Barclays’ performance in the first quarter.

Fall in operating expenses remained a tailwind, driven by expense-savings initiatives. Also, the performance of all segments, except Head Office and Other Operations, were impressive. However, a decline in net operating income marginally dragged the results.

Performance in Detail

Adjusted net operating income was £6.0 billion ($9.0 billion), down 2% year over year.

Adjusted profit before tax grew 9% from the year-ago period to £1.8 billion ($3.0 billion). The rise reflected improvements in the Investment Bank, Personal and Corporate Banking, and Africa Banking.

Notably, statutory profit before tax fell 26% from the prior-year quarter to £1.3 billion ($2.0 billion).

Operating expenses (excluding Transform-related costs, and litigation and conduct charges) totaled £3.9 billion ($6.0 billion), down 5% year over year. Cost to income ratio was 64%, down from 67% in the year-ago quarter.

Segment Details

Personal and Corporate Banking: Profit before tax came in at £787 million ($1,193 million), up 14% 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 £366 million ($509 million), a marginal decline from the year-ago period.  The fall was owing to a rise in operating expenses, partly offset by higher net operating income and a fall in credit-impairment charges.

Africa Banking: Profit before tax came in at £295 million ($447 million), a rise of 23% from the prior-year period.  The fall largely reflected an increase in net operating income.

Investment Bank: Profit before tax grew 37% from the year-ago period to £675 million ($1,023 million). A rise in Banking & Markets revenues and lower expenses were the primary reasons behind the growth.

Head Office and Other Operations: Loss before tax was £19 million ($29 million), compared with a profit before tax of £60 million ($99 million) recorded in the prior-year quarter.

Barclays Non-Core: Loss before tax amounted to £256 million ($388 million), deteriorating from a loss of £154 million ($255 million) incurred in the year-ago quarter.

Balance Sheet and Capital Ratios

Total assets as of Mar 31, 2015 came in at £1,416 billion ($2,356 billion), up 4% from Dec 31, 2014 level. As of Mar 31, 2015, Common Equity Tier (“CET”) 1 ratio was 10.6%, up from 10.3% as of Dec 31, 2014.

Total risk-weighted assets fell nearly £6 billion to £395.9 billion ($659 billion) as of Mar 31, 2015. The decline was mainly triggered by a £10 billion fall in Non-Core and the run-down of legacy structured and credit products.

Further, the Prudential Regulation Authority (“PRA”) leverage ratio was 3.7% as of Mar 31, 2015.

Our Viewpoint

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

However, possible litigation headwind arising from regulatory investigations remains a plausible concern. In addition, slow revenue growth, tepid global 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 Sell).

Among other foreign banks, HSBC Holdings plc (HSBC - Free Report) and Itaú Unibanco Holding S.A. (ITUB - Free Report) are slated to report results on May 5; while Mitsubishi UFJ Financial Group, Inc. will report on May 15.

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