Barclays Reveals Profit Increase Despite PPI Claims

Barclays International, the bank's corporate and investment banking arm, posted strong profit thanks to its trading business

Derya Guzel 27 October, 2016 | 4:47PM
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Barclays' (BARC) third-quarter results came in strong on the heels of its recently announced diversification plan. Its core business delivered 4% growth in profit before tax and return on average equity of 9.1%. On a group level, profitability remained pressured, as the bank is still progressing with the rundown of its noncore unit. However, Barclays International, its corporate and investment banking arm, posted strong profit thanks to its trading business.

All lines of the markets business posted strong quarterly figures year over year. Management noted that, thanks to this strong performance, the bank managed to gain market share in the United States. Barclays is guiding to complete the rundown process by year-end 2017, and its progress so far convinces us that it is on target to deliver that.

During the quarter, Barclays sold its index business and its Italian retail banking network, and the bank is looking to make further progress with the rundown in the fourth quarter. Following what we view as relatively strong results, we maintain our fair value estimate of £2 per share. At current levels, shares look slightly undervalued. We're maintaining our no-moat rating for Barclays at this point as we do not believe it has a competitive advantage over peers.

£600m for PPI Mis-selling Claims

The bank has put aside £600 million in payment protection insurance provisions this quarter, as well as revealing a pension deficit of £1.1 billion. Focusing further on the PPI charges, the £600 million set aside this quarter brings the total reserves on this issue to £1 billion for the year to date, with the addition of £400 million in provisions set aside during in the previous quarter.

With the inclusion of the PPI charges in 2015, total provisions sum to £2.3 billion. Given the current market knowledge on the issue, Barclays does not expect any further provision charges for PPI. As we pointed out following Lloyds' results, at this point, we believe the PPI scandal is largely behind for UK banks, and banks are working in harmony with the Financial Conduct Authority to resolve the matter. Moreover, banks are setting aside the additional provisions needed to meet the extended 2019 deadline set by the FCA, which was a year later than the industry originally expected.

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Derya Guzel  is an Equity Analyst for Morningstar