Barclays Steps Up Cost-Cutting Measures After Poor Q4 Showing
Investors were clearly not happy with the bad press Barclays (NYSE:BCS) attracted early last week, when it was revealed that an insider at the U.K.-based banking group sold highly sensitive information about 27,000 customers. [1] The debacle raised fresh concerns about internal control policies at the bank, which has already drawn considerable criticism in recent years for its role in the rate-rigging scandal, and also for wrongly selling payment-protection insurance (PPI) and interest-rate derivative products to customers.
The bank’s worse-than-expected performance for the last quarter of the year only made things worse, with Barclays reporting a loss of £514 million (~$860 million) for the period. [2] Adjusting the results for non-recurring costs (like those related to its “Transform” reorganization plan) shows that Q4 2013 was the weakest quarter in terms of pre-tax operating incomes since Q1 2012. The cause can be readily traced to Barclays’ investment banking operations, which saw nearly no change in revenues compared to the poor Q3 figures, but ended up with higher compensation as well as litigation expenses for the period.
Pre-empting investors’ response to the results, Barclays sought to dissipate some of the concerns with its decision to do away with 12,000 more jobs – roughly 9% of its global workforce. But that could not stop the bank’s shares from losing roughly 6.5% of its value over the week.
We maintain a price estimate of $18 for Barclays’ stock, which is about 5% ahead of the current market price.
See our full analysis for Barclays’ stock
Fixed-Income Trading Desk Underperforms For Second Consecutive Quarter
Barclays’ investment banking operations, which include its trading, advisory and underwriting units, generated £2.1 billion (~$3.6 billion) in revenues for Q4 2013 – marginally higher than the figure for the previous quarter and a good 18% below the figure for Q4 2012. This mirrors the trend witnessed in the bank’s fixed-income business, which churned out half of that figure. This was largely expected since the banking industry is suffering as a whole from poor debt trading activity over the second half of 2013 – a consequence of the interest rate uncertainty in U.S. markets for the period.
The equities desk did not fare too well either, roping in less than £500 million (~$840 million) for the period. This was the worse performance by Barclays’ equities trading unit since Q4 2011, and is a far cry from the £825 million (~$1.4 billion) figure it reported in Q2 2013 (the highest since the downturn of 2008).
Improved Retail Banking, Cost Efficiency Are Something To Look Forward To
One thing that stood out in Barclays’ performance figures for the year 2013 was that the bank did not incur a major regulatory or impairment charge in the last two quarters of the year. This is a welcome change from the bank, which has set aside billions over the last three years as provisions for PPI redressals and interest-rate products redressals. And while the bank’s legal troubles are far from over, it looks like these two issues – which have significantly dragged down performance figures – are a thing of the past.
This should allow the bank to focus on long term growth and sustainability measures – something it plans to achieve through Project Transform. And as we had pointed out in our article The Big Four U.K. Banks Have Cut Jobs Dramatically And There Is More To Come, the reorganization plan will rely heavily on cutting costs by doing away with jobs. The bank detailed its decision to do away with between 10,000 to 12,000 jobs over the year – a sizable part of its 139,600-strong employee base at the end of 2013 – with around 7,000 of jobs being shed in the U.K.
The partial impact of a marked increase or decrease in non-interest expenses on Barclays’ share price can be understood by making changes to the chart below, which represents the cost-to-revenue ratio for the bank’s global retail & business banking business.
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Notes:- Exposed: Barclays account details for sale as ‘gold mine’ of up to 27,000 files is leaked in worst breach of bank data EVER, The Mail, Feb 8 2014 [↩]
- Barclays 2013 Full Year Results Announcement, Barclays Press Releases, Feb 11 2014 [↩]