The interim results announced by U.K.-based banking giant Barclays (NYSE:BCS) may not look too great when it comes to revenue or earnings growth, but it highlights a lot of things that the bank seems to have finally gotten right.  The pre-tax operating income of £1.8 billion ($2.7 billion) Barclays achieved in Q1 2013, is lower than what it reported for each of the first three quarters of 2012. And the bank’s revenues of £7.7 billion ($11.8 billion) for the quarter are also 5% lower than the £8.1 billion ($12.4 billion) figure for Q1 2012 (excluding all one-time and debt revaluation charges).
So what do we mean by things that the bank did right? For starters, this is the first quarter since Q1 2011, when Barclays has not incurred a single regulatory or impairment charge. The income statement features no provisions for PPI redressals, no provisions for interest-rate products redressals and no goodwill impairment – all of which have plagued the bank for quite some time now. Also, the bank has shown a decent quarter-on-quarter improvement in operating performance across almost all its operating divisions with better-than-expected figures for its investment banking operations.
And finally, the biggest factor behind top line improvements not reflecting in the bottom line is the £514 million ($784 million) in expenses related to the Transform program, which was kicked-off this February – an organization-level plan expected to save £1.7 billion ($2.6 billion) in expenses by 2015 (see Barclays Announces Job Cuts, Shakeup After A Forgettable 2012).
We have revised our price estimate for Barclays’ stock upwards from $21 to $22, largely to factor in the improvement in performance by its investment banking division.
Strong Trading Figures Buoy Revenues For The Quarter
Barclays’ investment banking operations, which include its trading, advisory and underwriting units, generated £3.8 billion ($5.8 billion) in revenues this quarter – coming quite close to the record figure of £3.9 billion reported three years ago in Q1 2010. While the fixed income trading unit contributed to nearly two-thirds of this figure with its revenues of £2.2 billion ($3.4 billion), what really caught our eye is the performance of Barclays’ equities trading unit, which churned out revenues in excess of £700 million ($1.1 billion) for the first time since 2009. Trading figures were no doubt assisted by the marked increase in demand for high-yield debt products in the recent past, along with an uptick in the global equity markets.
The strong results for both equities and debt trading combined with the steady advisory & underwriting performance helps reinforce our view that Barclays’ investment banking division will continue to remain its biggest source of value.
Consumer Banking Business Looks Ready To Turn The Corner
In 2012, Barclays reported a sequential decline in its revenues and income figures for all three of its consumer banking business units divided on the basis of geography as U.K., Europe and Africa retail & business banking. The biggest concern was its business in Europe, which reported a loss in almost each quarter over the last three years with the problem of low revenues from declining interest rates being compounded by higher provisions on loans handed out in the economically unstable region.
The situation looks set to change with the implementation of the Transform program, which prioritizes shuttering most of the loss-making European retail branches. The impact should be visible by the end of the year itself with operating expenses for the bank’s global retail operations finally expected to decrease as a percentage of total revenues after growing considerably over the recent years as shown in the chart below.Notes: