Barclays (BARC)


Analysts split on Barclays as profits fall

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First-quarter pre-tax profits at Barclays (BARC) fell 25% as the lender aimed to transform itself into a "Go-To" bank.

Pre-tax profits came in at £1.78 billion, driven by a charge of £514 million to cover Barclays' "Project Transform", a plan to axe 3,700 jobs, cut back its investment-banking arm and generally overhaul the bank's culture. Return on equity decreased to 7.6% in the first quarter of 2013, from 12.4% in the same period of 2012.

Barclays expects to make a further £500 million charge later this year.

Income at the investment bank was up 1% at £3.46 billion and up 34% on the fourth quarter of 2012, while credit impairment charges decreased 10% to £706 million, principally reflecting improvements in the investment bank and corporate banking.

The financial group's core tier one ratio strengthened to 11%, up from 10.8% in the same period of 2012, principally due to capital generated from earnings and the exercise of warrants.

During 2012, Barclays absorbed provisions of £1.6 billion for PPI mis-selling and £850 million for interest-rate swaps, as well as a £4.6 billion own credit reversal.

The first-quarter of 2013 results were "clean" aside from a previously guided £500 million restructuring charge.

"We set out in our Strategic Review in February our path to become the 'Go-To' bank for all our stakeholders. While there remains much to do to build a stronger and more resilient Barclays, we are completely focused on executing our 'Transform' programme and are making good early progress," commented chief executive Anthony Jenkins.

"In our goal to become the 'Go-To' bank we have not chosen an easy path for Barclays, but we have chosen the right one."

Analyst view

Ian Gordon, analyst at Investec Securities, reiterated a 'buy' recommendation on the stock with a target price of 345p, commenting the first quarter results were "no sell-out, no compromise [and] no surrender".

"Ignore the excruciating references to Barclays as the 'Go-To' bank, these are results of which [former group chief executive] Sir Bob [Diamond] would be proud," said Gordon.

At the statutory level, he explained Barclays "surged back into reported profit in the first quarter of 2013, reflecting a solid underlying performance and materially lower exceptional items.

"It is expenses, as well as revenues, that is driving what we regard as a sustainable improvement in Barclays Capital profitability and returns. Bob Diamond boldly initiated the repositioning process, slashing costs by £1 billion [or 12%] in 2011. Momentum optically slowed in 2012, reflecting a combination of 'drag' from deferred compensation, as well as the UK/US Libor settlement, but investors should be in no doubt as to the direction of travel.

"Barclays is still the only UK bank to have outperformed the FTSE 100 (UKX) year-to-date," he added. "Notwithstanding the stock's extended period of strong absolute and relative outperformance stretching back to July 2012, we see its unique combination of top-line growth, improving market shares, materially improving cost-efficiency metrics, low impairments and valuation support as continuing to offer investors the most attractive option within the UK bank sector."

Gordon concluded: "Barclays remains our top pick."

Contrary to the Investec analyst, Carla Antunes da Silva, analyst at Credit Suisse, rated the stock 'neutral' with a lower target price of 290p.

Yet she said overall results were "slightly better than Credit Suisse's estimate and in line with consensus driven by a stronger investment bank result".

Da Silva added the outlook statement was positive, saying: "The good start to the year has continued into the second quarter across their businesses.

"We expect the stock to go slightly better and remain neutral," she predicted.

Nic Clarke, analyst at Charles Stanley gave a 'hold' recommendation on the stock, commenting that it did not look "particularly expensive on a valuation basis", trading on just 0.7 times book value and a prospective price/earnings ratio (P/E) of around 8.0 times.

Yet, despite what Clarke called "mixed" results, he pointed out: "It is early days to assess how 'Transform' is faring but some of the targets do look quite stretching."

He explained the "areas of risk to the plan" were weaker-than-expected economic growth, although Barclays stated its assumptions were conservative; the regulatory environment becoming harsher still; legacy issues becoming an even greater burden than already expected; and management executing the plan poorly.     

Looking ahead, Clarke added: "Barclays has complicated regulatory issues to deal with, customer redress for PPI and interest-rate hedging products could prove more expensive than expected, income remains fairly anaemic and the bad debt charge is unlikely to continue to boost results.

"In short, things are unlikely to get easier in the near term," he concluded.