Impact Of Project Transform Evident In Barclays’ Q3 Results

-4.90%
Downside
9.08
Market
8.63
Trefis
BCS: Barclays logo
BCS
Barclays

Barclays (NYSE:BCS) reported better-than-expected performance figures for the third quarter of the year on Thursday, October 30, with the results validating the British banking giant’s large-scale reorganization plan under Project Transform. ((Barclays plc Q3 2014 IMS, Barclays Earnings Releases, Oct 30 2014)) The results were peppered with a string of one-time charges, including a £500 million ($800 million) increase in legal provisions to cover ongoing settlement talks over forex manipulation, a £364 million ($580 million) loss on the sale of its Spanish business, and another £170 million ($270 million) in reserves for its PPI-related misgivings. But the positive impact of a £461 million ($740 million) gain on U.S. Lehman acquisition assets and an unexpected £160 million ($255 million) release in reserves for interest-rate product redressals mitigated the impact of these charges on the bottom line to a great extent – making it easy to see the improvement in performance for the bank’s personal and corporate banking as well as Barclaycard divisions.

Barclays’ total revenues (adjusted for all one-time items) saw a 3% improvement year-on-year. Coupled with a 30% reduction in loan impairments from improving credit conditions and an 8% reduction in adjusted operating expenses thanks to the cost-cutting efforts, the bank’s pre-tax income jumped 41% compared to the year-ago quarter to reach almost £1.6 billion ($2.5 billion). It should be noted that while this is slightly below the adjusted pre-tax income figure of £1.7 billion seen in each of the first two quarters of the year, the investment banking division was the only one to witness a sequential reduction in profitability – speaking volumes about the effectiveness of Barclays’ reorganization effort.

We maintain our $18 price estimate for the bank’s stock, which is about 25% ahead of the current market price. We believe this difference can be largely attributed to the sell-off in the shares of European banks over recent weeks due to the weak economic outlook for the region, and the fact that investors remain cautious about Barclay’s legal overhang.

Relevant Articles
  1. Barclays Stock Trailed S&P 500 By 23% In 2023, What Happens Next?
  2. Barclays Stock Is Undervalued
  3. Where Is Barclays Stock Headed?
  4. Barclays Stock Is Undervalued
  5. What To Expect From Barclays Stock?
  6. After Earnings Miss In Q2, Where Is Barclays Stock Headed?

See our full analysis for Barclays’ stock

Personal and Corporate Banking Operations Continue To Drive Results

The success of Barclays’ Project Transform reorganization plan depends to a great extent on the ability of the bank to leverage its geographically diversified retail and corporate banking presence to also boost demand for its wealth management services. Although the bank has only provided a detailed breakdown of operating figures for its newly formed reporting structure since Q1 2012, it is clear that this was the best quarter for the personal and corporate banking division since the economic downturn of 2008 in terms of pre-tax income. Adjusted pre-tax income for the division was £789 million ($1.26 billion) in Q3 2014 – 11% better than the figure for Q3 2013 and slightly better than in Q2 2014. Notably, this is 50% of the bank’s total pre-tax income figure for the quarter.

Last quarter, we pointed out how the personal and corporate banking division had fared better than the investment banking arm over the first half of the year for the first time since the economic downturn of 2008. The fact that this happened again this time around likely means that the trend of poor retail banking performance is over.

Card Business Fares Better Than Investment Banking Operations

Barclays decided to retain its card business almost entirely in its original form as a part of its reorganization plan, thanks to the division’s almost exclusive focus in U.K. and U.S. coupled with its strong presence in these markets. The Barclaycard unit has shown a quarter-on-quarter improvement in revenues for nearly each quarter since Q1 2012 thanks to a steady increase in the size of outstanding card balances as well as card usage volumes. At the same time, credit provisions and non-interest expenses have remained almost constant over this period – with these figures showing a notable fall over the first two quarter of the year.

The fact that the third quarter is a slow period for credit card operations, as well as the slight increase in impairments, reduced the division’s pre-tax income figure by 8% compared to the previous quarter, but it was still a good 17% better than the performance for the same quarter last year. Also, Barclays’ card loan portfolio increased to £34.8 billion ($55.6 billion) at the end of the period – a 5% jump quarter-on-quarter.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research