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Barclays' 1Q Earnings Disappoints

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Barclays PLC (BCS - Free Report) reported net operating income of £7,028 million ($10,917 million) for first-quarter 2013. This reflects a decrease of 4% on a year over year basis.

Huge statutory losses were the primary reason behind the poor quarterly performance, partly offset by marginally lower operating expenses. However, performances of a few segments – UK Retail and Banking Business, Barclaycard, Investment Bank and Wealth and Investment Management – were credible. Further, capital ratios were strong in the quarter.

Performance in Detail

Adjusted profit before tax plunged 25% year over year to £1,786 million ($2,774 million). The fall was mainly due to lower levels of net operating income, partially offset by higher other income.

However, statutory profit after tax in the reported quarter was £1,044 million ($1,622 million) compared with a loss of £385 million ($605 million) in the prior-year quarter.

Operating expenses (excluding UK bank levy and costs to achieve Transform) for the quarter totaled £4,782 million ($7,428 million), down 4% from the year-ago quarter. Cost to income ratio was 71%, as against 96% in the prior-year quarter.

Business Overview

UK Retail and Banking Business: Adjusted profit before tax for the quarter came in at £299 million ($464 million), up 29% from the prior-year quarter. The rise was mainly due to non-occurrence of provision for Payment Protection Insurance (PPI) redress recorded in the last year quarter.  In Mar 2013, the company acquired ING Direct UK from ING Groep NV (ING - Free Report) .

Europe Retail and Banking Business: Loss before tax for the quarter came in at £462 million ($718 million), deteriorating significantly from the last-year quarter. The segment incurred a loss primarily due to costs to achieve Transform.

Africa Retail and Banking Business: Profit before tax for the quarter came in at £81 million ($126 million), down 39% from the prior-year quarter. Excluding the impact of foreign currency movements, profit before tax fell 24%.

Barclaycard: Profit before tax for the quarter came in at £363 million ($546 million), up 5% from the year-ago quarter.

Investment Bank: Profit before tax increased 11% year over year to £1,315 million ($2,043 million).

Corporate Banking: Profit before tax for the quarter came in at £183 million ($284 million), decreasing 10% year over year.

Wealth and Investment Management: Profit before tax for the quarter came in at £60 million ($93 million), surging 20% from the prior-year quarter.

Head Office and Other Operations: Adjusted loss before tax was £53 million ($82 million) compared with adjusted profit before tax of £321 million ($504 million).

Balance Sheet and Capital Ratios

Total assets as of Mar 31, 2013 came in at £1,596 billion ($2,424 billion), up 7% 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.

As of Mar 31, 2013, core tier 1 ratio stood at 11.0% as against 10.8% as of Dec 31, 2012. Total risk weighted assets came in at £398 billion ($605 billion), up 3% sequentially.

Our Viewpoint

Going forward, we expect Barclays’ diversified business model and sound financial position to consistently contribute to its overall growth in the future. Further, steady capital deployment activities will continue to reinforce investors’ confidence in the stock.

The possible litigation headwinds, arising from investigation of regulatory authorities, draw our 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 Banco Macro S.A. (BMA - Free Report) carrying a Zacks Rank #1 (Strong Buy) and Deutsche Bank AG (DB - Free Report) with a Zacks Rank #2 (Buy).

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