Barclays plans early closure of bad bank as full year profits rise
Barclays posted fourth-quarter results shy of consensus and cut its dividend, as expected, but said it would complete its restructuring six months earlier than previously planned.
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For the fourth quarter, adjusted pre-tax profit jumped almost fourfold to £0.3bn but was just half of the consensus of analyst forecasts as there was a larger than expected exceptional cost from a rejigging of how bonus structures are recognised on the income statement.
Reported pre-tax profits for 2016 almost tripled to £3.2bn, with profit before tax and excluding notable items was up 4% to £6.4bn, delivering a 9.4% return on tangible equity up over 10% to £41bn.
Profits for 2016 were boosted as even though revenue fell 6% to £19.1bn, the FTSE 100-listed bank chopped its litigation and conduct costs down by two thirds to £1.4bn.
Within those costs, provisions for customer redress for payment protection insurance were cut to £1bn from over £2.6bn.
Of the core business, UK pre-tax profits leapt 190% to £1.7bn from £585m while international income grew to £4.2bn from £3.2bn.
While basic earnings per share returned to the black at 10.4p the final dividend of 2.0p per share resulted in a total 3.0p dividend per share for the year, less than half the 6.5p from 2015. This was as guided by management, who also have said the 2017 dividend is likely to remain unchanged with growth resuming thereafter.
The growth in profits drove a 100 basis points improvement in organic capital ratio to a CET1 ratio of 12.4%, up by 80bps in the fourth quarter, beating consensus of 11.9% and said to be on track to meeting revised CET1 capital ratio of 150bps-to-200bps, providing a 400-450bps buffer to the Bank of England stress test systemic reference point.
Chief executive Jes Staley highlighted the income growth of 6% at the corporate and investment bank, "solidifying our position in the bulge bracket", and hailed strong growth in consumer, cards and payments, where income increased 21%.
"Accelerating the closure of Barclays Non-Core is a key part of realising the potential of Barclays. In 2016 we reduced non-core RWAs [risk weighted assets] by £22bn, with £12bn of that reduction coming in the final quarter alone.
"Today, we are announcing that we will close Non-Core on 30 June 2017, six months earlier than previously targeted."
As part of this, the bank has agreed terms with its subsidiary Barclays Africa to further reduce its stake below 50%.
This will bring around £25bn of risk weighted assets folded back into the group, consisting primarily of residual derivatives, Italian mortgages and the ESHLA (education, social housing and local authorities) portfolio.
For 2017, the bank said the loss before tax generated by non-core operations is expected to be approximately £1bn, excluding fair value gains or losses on the ESHLA portfolio, with a greater proportion of this loss is expected to occur in H117 reflecting continued exit costs. This was largely expected.
Positive reaction
Shares in Barclays were up 3% to above 242p, around their highest level in more than 15 months, before sliding sharply into negative territory as the session wore on.
Deutsche Bank noted the fourth-quarter core operating profit was a miss versus the consensus, with income 2% ahead of consensus, costs 10% higher, and impairments 16% higher.
The inclusion of the £390m charge relating to bonus awards, increasing proportion of bonus awards paid in current year from 54% to 70%, and charging a third of deferred bonuses awarded in the current year.
"We regard both of these items as timing accelerations effectively bringing forward future costs to current year," Deutsche said, with overall compensation awards down 1% YoY which should mean lower deferred charges in future years.
"Excluding this £390m charge, Barclays would have beaten on both income and costs versus consensus by 2%, 8% at the PPP level and 5% at the operating profit level."
Analyst Laith Khalaf at Hargreaves Lansdown said the bank's lower PPI costs and currency tailwinds were the main boost to profits, and praised the progress in winding down the bad bank that has been holding the group back.
"The performance of Barclays’ core UK and international divisions was somewhat underwhelming though, with underlying profits actually falling back slightly," he said.
"Overall Barclays is in better shape than it was, and the accelerated timetable for the run-down of its non-core assets will be received positively by the market. However once the bad bank is consigned to the history books, there will be nothing for management to hide behind if the core business is not delivering."
Mike Van Dulken at Accendo Markets said management optimism chimes well with bullish investors who are equally optimistic about the group’s new focus in the context of economic recovery, gradual tightening of monetary policy and a potential boost from potential sector de-regulation inspired by the new US administration.
He said Barclays the core growth "harks back to better years when investment banking accounted for the lion’s share of the group’s profits and bodes well for Jeff Staley’s gamble in pivoting focus back towards a struggling unit in which he saw superior growth potential".
Van Dulken added that if the bottom line maintains growth momentum, "there could even be potential for this period of lower pay-outs to be cut short, attracting fresh interest that propels the shares back towards 2013 highs of 300p".