OREANDA-NEWS. Fitch Ratings says Barclays plc's (A/Stable/a) planned business disposals, most notably the intention to sell its African and selected investment banking, wealth and credit card businesses, highlight the bank's struggle to achieve sustainable profits with its current profile.

The group announced a 4Q15 loss (on both statutory and adjusted basis) and a full-year loss, after preference share and AT1 distributions. The disposals should, in our opinion, help Barclays increase returns and improve capitalisation over time, but will induce some volatility in earnings until implemented. Barclays' ratings are primarily sensitive to progress in achieving sufficient core profitability to absorb non-core and misconduct costs.

Barclays' quarterly performance was dragged down by large litigation (GBP1.6bn added in 4Q15) and non-core related losses. We expect conduct and restructuring costs to remain high as Barclays works through its legacy cases and progresses with its restructuring plan. The announced top-up of Barclays Non Core (BNC) with GBP8bn risk-weighted assets (RWAs) and its accelerated run-down to RWA GBP20bn by end-2017 entails some execution risk, in our opinion. Barclays plans to offset the additional restructuring and operational costs relating to BNC by a temporary decrease in dividend.

Barclays' core businesses achieved a modest 4.7% return on average common shareholders' equity (RoE) and a 21% y-o-y decrease in profits before tax (PBT) in 4Q15. Full-year core profits for the group were helped by a strong 1H15, but the adjusted RoE of 9% was slightly below 2014's. Stronger quarterly performance in Barclaycard and personal and corporate banking (PCB) were offset by losses at the investment bank (IB) and weaker Africa Banking returns.

PCB's quarterly profit before tax increased 5% y-o-y, as revenue lost from the disposal of the US wealth business and mortgage margin pressure were offset by lower operating costs resulting from the group's strategic cost-cutting programmes and technology investments, and cyclically low loan impairment charges. Customer loans decreased 1.1% over the quarter to GBP218.4bn, while RWAs also decreased 1.4% to GBP120.4bn.

Barclaycard continued to be a strong contributor to group profitability, with quarterly revenues increasing 5% and PBT 55% y-o-y, aided by loan growth in the US and favourable foreign exchange movements. Loan balances increased 1.5% in the quarter to GBP39.8bn. Loan impairment charges increased, but were stable y-o-y relative to average loans.

The IB recorded 12% y-o-y lower revenues, in a difficult market environment. Banking revenues decreased on lower underwriting and lending income. Equities trading decreased 25% y-o-y, driven by equity derivatives and block trade losses. Macro trading suffered from weak client activity in Asia, but Credit benefitted from higher revenues in US fixed income, so that overall fixed income, currencies and commodities trading achieved a moderate 1% revenue loss. The division's RWAs decreased over the quarter to GBP108bn from GBP120bn, and the group indicated that there is no intention to further decrease RWAs.

Africa Banking's quarterly PBT decreased 18% y-o-y on the back of the rand depreciating against sterling.

BNC generated a loss of GBP610m, due to lost income in discarded businesses and the run-down of the division's securities, loans and derivatives. The group expects the negative revenue incurred in 4Q15 to be an indicative run-rate for 2016. The unit will also incur around GBP1bn operational and restructuring costs related to the accelerated run-down of BNC in 2016, according to the group. A failure to reduce BNC exposure in a timely and controlled manner leading to persistently weaker profitability could put ratings under pressure, but the announced cut in dividend for 2016 and 2017 will help mitigate the impact on capital of the larger losses. Barclays announced that it was adding the subsidiaries in Zimbabwe and Egypt and further international investment banking, Asian wealth and Southern European credit card businesses to the non-core unit.

Barclays reported an increase in its regulatory CET1 ratio to 11.4% at end-2015 from 11.1% at end-3Q15, largely achieved through RWA reductions. The group aims to maintain a management buffer of 100-150bp over its long-term regulatory minimum requirement, which including the revised 2016 Pillar 2A CET1 component of 220bp (from 160bp in 2015) suggests a target of 12.7%-13.2%. Barclays' leverage ratio improved during the quarter to 4.5% from 4.2%, which is within the range of its global trading and universal bank peers.

Over the medium-term, we expect the announced disposals to be accretive to Barclays' capital ratios, but only once regulatory deconsolidation is achieved, which for most of BNC assets should happen by 2017. The planned reduction of its 62.3% ownership of Barclays Africa Group Limited (BAGL) to a non-controlling stake could take up to three years, according to management. We expect that the group will need to dispose of the majority of its stake to deconsolidate the associated RWAs.

In 2016 Barclays will change its divisional structure to match the expected allocation of certain domestic activities to a new ring-fenced entity, Barclays UK (BUK) while other businesses are set to remain in Barclays Bank plc and report as the Barclays Corporate and International (BCI). BUK will include the group's domestic retail, credit card, business banking and wealth management businesses with associated RWAs of around GBP70bn, while BCI will host GBP195bn RWAs to include the corporate and investment banking, payments and merchant acquiring and international card and wealth management businesses. We expect the group's legal structure to evolve over time, as the UK ring-fence and the US intermediate holding company are set up, and businesses are sold, which could lead to rating differentiation between legal entities.