Barclays profits tumble 25 per cent as investment banking woes continue

Catherine Neilan
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Barclays pre-tax profits have fallen by almost a quarter year-on-year as the investment bank division struggled to perform.

But with a sign of progress being made, and confidence about the outlook for the rest of the year, Barclays' share price rose 3.9 per cent in early trading.

The figures

Barclays' first quarter pre-tax profit dropped 25 per cent to £793m, as total income net of insurance claims fell 11 per cent to £5.04bn, with non-core income dropping £464m to a net expense of £242m.

Core income decreased by three per cent to £5.3bn, including an own credit loss of £109m. Profit after tax for continuing operations increased three per cent to £545m.

Underlying profit before tax, which notable items, fell by 44 per cent to £902m as Barclays chalked up a loss in its non-core division of £815m, compared with a profit of £274m in the same period last year.

Total group underlying income decreased seven per cent to £5.2bn and total operating expenses increased eight per cent to £3.8bn.

Credit impairment charges increased 15 per cent to £443m - in line with expectations - "primarily driven by the impairment of a number of single name exposures, largely in respect of clients in the oil and gas sector", the bank said.

Total operating expenses reduced seven per cent to £3.8bn.

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Why it's interesting

Barclays warned last month that its first quarter would be weaker than last year due to challenging market conditions and a "particularly strong" March 2015.

At the time new chief executive Jes Staley revealed a major restructure of the business, including a cut of more than half to dividends and plans to reduce its stake in Africa, after the bank posted a drop in full year profits. The move prompted the share price to plummet, forcing it to be suspended during the day, before closing down more than seven per cent.

Staley's plan was to create two, main core divisions - Barclays UK and Barclays Corporate and International. Today he said the lender was making "good progress" on that strategy.

"The performance of the core today shows the potential power of the group once it is freed from the drag of non-core," he noted.

It's not the only British bank being forced to undertake a drastic turnaround plan. Standard Chartered, which yesterday revealed it had missed revenue targets, although showed improved bottom line figures, is also part-way through a massive restructure under new boss Bill Winters.

What Barclays said

Staley added: "It is the first set of results as a transatlantic consumer, corporate and investment bank operating under our new configuration of Barclays UK and Barclays Corporate & International, and they show a Core business performing well in a challenging environment.

"We can see clear growth opportunities, such as in our Consumer, Cards and Payments business, in which we want to continue to invest. The performance of our Corporate and Investment Bank was relatively resilient in a tough quarter, but there is more we must do to improve returns, and we are focused on management actions to do so.

We continue to target cost reductions in the Group and we are on track to meet our 2016 guidance for the Core business of £12.8bn, and our longer-term target of a Group cost to income ratio under 60 per cent."

Regarding Africa, Barclays is continuing to "explore opportunities" - former Barclays boss Bob Diamond has thrown his hat into the ring but there was no confirmation of whether he would be in line to snap the shares up today.

"We promised to accelerate the pace of progress in reducing non-core so that our group performance converges with our core performance within a reasonable timeframe. Since the 1st of January, we have made progress in exiting from Investment Banking in nine countries, completed the sale of our Portuguese retail, wealth and SME banking businesses, and are progressing other announced sales, including the Italian branch network, the Index business and our Asian wealth business, towards completion in 2016.

As these deals complete we are reducing RWAs and, crucially, eliminating costs which have a direct impact on our profitability today and mask the true performance of our strong Core business. This is the work we need to complete."

What analysts said

Alex Joyner, senior analyst at Galvan Research, said: "With pre-tax profit coming in around £50m lower than expected and a drop in capital ratio it hasn’t been a great start to the year for Barclays. Tough trading conditions, bad loans and higher operating expenses have all weighed significantly on results.

"That being said, a planned ramp up in the cost-cutting and restructuring strategy is encouraging and should help the bank to meet full-year guidance.

"With sentiment surrounding the UK banking sector still heavily subdued ahead of June’s EU referendum, Barclays shares could present a good buying opportunity for investors betting against a Brexit."

Mike van Dulken, head of research at Accendo Markets, added: "Barclays shares have broken above March and April highs with potential to challenge the downtrend from last August as markets react favourably to first quarter results.

"This comes on the back of yesterday’s very bullish response to an update from emerging-markets focused peer Standard Chartered, which saw its stock put on over 10 per cent. It also follows a largely positive results season for stateside counterparts."

He added: "The positive read would, appear to derive from comments from new chief executive and investment bank veteran Jes Staley who said that the key division’s performance had been resilient and his plans are to keep it roughly as is, avoiding any drastic downsizing that might have been on the cards under the tenure of ex-chief executive and retail bank-focused Antony Jenkins.

"Investors are perhaps hopeful that things are on the up from the group, with better returns on the horizon via a revamped investment banking division - the one that made it such a success in years gone by. It may be too early to comment on Q2, on account of a challenging environment and work still to do, but Barclays' shares have plenty to say this morning."

In short

A big drop in profits from a major UK lender - but progress is being made for the future.