This morning’s nine-month report from Barclays (BARC) seem to be well received by investors with the shares trading up 3% at 171p, comfortably last week's 2-year lows.
From a top-down point of view the results aren't stellar and loans and deposits, the basic banking business, still show almost no growth from this time last year. As a result net interest income, the amount the bank makes on loans minus the interest it pays on deposits, is slightly down as competition for customers is pushing down returns.
Fortunately pre-tax earnings were boosted by lower than expected impairment charges (money put aside to cover bad and non-performing loans). These came in around £200m lower than most forecasts for the first nine months, helping pre-tax profits to rise by 23% to £5.3 billion excluding litigation and PPI charges.
INVESTMENT BANK SEES TRADING INCOME RISE
Barclays breaks its earnings down into three units, UK, International (which includes the investment bank) and Head Office.
Total income at the UK unit was flat at £5.5bn or about a third of group revenues with personal banking, the biggest contributor, seeing a 3% decline while business banking and Barclaycard saw increases of 3% and 5% respectively.
Income at the International unit was down 2% at £10.8bn or about two thirds of group revenues. Turnover at the Investment Bank was flat at £7.6bn with a strong showing from its Markets division but a poor performance in banking fees.
Turnover at the smaller consumer, card and payment unit showed a 7% decrease due to changes in the valuation and composition of the business against a year ago, offsetting the better investment banking performance.
The Head Office unit takes all the costs of running the business and the numbers aren’t very useful although this is where the bank shows the charges for litigation and ‘conduct’ (PPI) which amount to over £1.5bn so far this year.
NO CHANGE TO FULL-YEAR FORECASTS
Operating costs were another plus with the bank cutting 3% from overheads over the period but management has advised that full-year costs will be in line with previous guidance so earnings upgrades appear unlikely.
In terms of liquidity and financial stability, and with an eye on the Bank of England’s December review, Barclays reported a Return on Tangible Equity ratio of 11% which is above its 2020 target of 10% and a 13.2% Core Equity Tier 1 ratio which is comfortably above the central bank target.
In a further sign of confidence the bank is using some of its surplus capital to buy in and cancel the US Dollar preference shares it had to issue in 2008 to help fund itself through the financial crisis.
Summing up, these results represent an improved performance on last year but the core UK banking business still lacks momentum. While the investment bank has had a good quarter the business is highly cyclical and there's no guarantee it can reliably repeat the trick.
The biggest investment bank in Europe, Deutsche Bank, is still struggling to increase revenues and continues to rack up large losses after three years of restructuring as its results today showed.
