Fitch: Barclays 1Q16 Core Profitability Resilient in a Difficult Quarter
OREANDA-NEWS. Fitch Ratings says Barclays' 1Q16 core bank results proved resilient in a difficult quarter, in the absence of material conduct provisions. However, the group incurred larger losses in the non-core bank (BNC) and overall pre-tax profits from continuing operations (ie, excluding Barclays Africa) fell 25% year-on-year in 1Q16.
The group is on track with reducing the BNC drag on group profitability, with discussions over the sale of the French retail, wealth, and investment management business, and as of this morning, the Barclaycard business in Portugal and Spain. Nevertheless, BNC will continue to add volatility to group results in the short term and depress overall earnings for 2016.
Cost reduction, a focus of the new management, is being challenged by structural reform implementation costs and further restructuring charges due to business-exits. Despite this, Barclays' core bank performed well on a statutory basis compared with 1Q15, although provisions for litigation, and business sale-related losses, absent in this quarter, and further losses in BNC, may affect the rest of 2016. Excluding these items, as well as own credit and pension adjustments, profit before tax decreased 8% as growth in operating expenses was not matched by the modest 2% increase in revenue. The group remains committed to reducing core operating expenses to GBP12.8bn in 2016 (excluding litigation and other notable items) through strategic cost-cutting programmes, digitalisation and further staff cost reductions. As stated in the 3Q15 results the group expects structural reform implementation costs of around GBP0.4bn to inflate operating costs in 2016.
Barclays now reports under a new divisional structure mirroring a new ring-fenced entity to be established by 2019. Barclays UK (BUK), which includes domestic retail, credit card, business banking and wealth management businesses with associated risk-weighted assets (RWAs) of around GBP70bn, is to become the ring-fenced bank by 2019. Barclays Corporate and International (BC&I), which includes Barclays' retained investment bank, as well as corporate, merchant banking and international credit card businesses, with a total GBP202bn RWAs, is set to remain in Barclays Bank plc, outside the ring-fence. In addition, it continues to report BNC and has begun to report Barclays Africa Group as a discontinued operation.
BUK saw profit-before-tax decrease slightly yoy on an underlying basis due to mortgage margin pressure and the impact of lower interchange fees, but the return on tangible equity remains strong at 20.5%. Loan balances were stable in the quarter and yoy, and loan quality continued to benefit from the group's prudent risk appetite in personal banking and a benign UK operating environment, as have credit impairment charges at Barclaycard UK. However, UK retail impairment charges are approaching a cyclical low, in our view.
Within BC&I the corporate and investment bank (CIB) performed well in a challenging quarter for the industry. Lower client activity led to lower equity and macro trading volumes, each declining by 13% yoy, but credit trading performed exceptionally well, compared with 1Q15 (up 46%) and peers, which we believe was helped by the division's lower inventories and flow-dependent business model. Banking income declined 5% yoy, as underwriting volumes were subdued, but within banking, advisory performed well. CIB impairment charges increased in the quarter, driven by single name exposures to the oil & gas industry. The division's total RWAs amounted to GBP172.6bn, around 48% of group total. BC&I's market and counterparty credit risk RWAs were 13% of group total.
Consumer Cards and Payments (CCP, also in BC&I) includes the card businesses in the US, Germany and Barclaycard Business Solutions. It continued to grow rapidly, with profit before tax up by 50% and loans and advances by 10%. Impairments remain well controlled in our view, benefitting from the group's experience in credit card lending and high credit quality customers from branded partners.
BNC generated a loss before tax of GBP815m, negatively impacted by a GBP374m fair value loss on the ESHLA portfolio, which comprises long-dated, high credit quality loans to public sector-related entities, which are particularly sensitive to movements in the gilt-swap spread.
Barclays' reported CET1 ratio of 11.3% is slightly below the 11.4% reported at end-2015, due to increased capital deductions for prudent valuation adjustments and intangibles, offsetting a quarterly profit. The group aims to maintain a management buffer of 100bp-150bp over its long-term regulatory minimum requirement, which, including the 2016 Pillar 2A CET1 component of 220bp (160bp in 2015), suggests a target of 12.7%-13.2%. Barclays' leverage ratio decreased during the quarter to 4.3% from 4.5%, due to seasonal effects but remains within the range of its global trading and universal bank peers.
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