There was both good and bad in Barclays’ (BARC) first-quarter results, in our opinion. The bank’s operating results showed improvement, supporting our thesis that it is likely to report decent profits in the medium term, but the size of the additional provisions for misconduct – some £800 million – were large enough to cast doubt on how long investors may have to wait for the medium term to arrive.
Still, the £800 million provided against an eventual settlement of charges that Barclays’ traders illegally manipulated foreign exchange rates is well within the £3 billion we’ve pencilled in for misconduct costs over the next few years, and we don’t expect to change our fair value estimate for the no-moat bank, excluding adjustments made to reflect our updated cost of equity methodology.
For investors willing to overlook Barclays’ deluge of misconduct charges, there was much to like in the bank’s underlying results. Underlying profit before tax increased 9%, to £1.3 billion, as a 3% drop in revenues related to Barclays’ de-risking was more than offset by a 7% drop in operating expenses. Moreover, the increase in underlying profit before tax was broad-based across divisions, excluding Barclaycard, where it was down 1% despite a 9% increase in revenue.
We find this encouraging, as we think that the improvement in profit is likely to be sustainable even when the rally in fixed income trading, which propelled a 37% increase in Investment Bank profit before tax, fades.
While we see increasing evidence that Barclays’ operating turnaround is taking hold, we think investors are likely to see bleak profits again in 2015. The £800 million litigation provision cut first-quarter profits in half, and restructuring charges are likely to cut into profits for the rest of the year as new chairman John McFarlane takes a hard look at Barclays’ underperforming businesses.
Investors are likely to see bleak profits again in 2015
