Barclays LIBOR Scandal Overshadows Impressive Earnings

by Trefis Team
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Barclays (NYSE:BCS) published its interim results for the first half of 2012, and the largest British bank ended up with a pre-tax income of £1.2 billion ($1.9 billion) for the quarter. These results came despite the fact that the bottom-line figures were marred by the $451 million in settlements related to the LIBOR manipulation scandal and an additional £450 million ($700 million) in provisions for PPI redressal. The bank which is yet to fill in the gaps left at its helm in the wake of the LIBOR scandal did well overall, with the decline in revenues over Q1 2012 essentially attributed to a reduction in trading revenues over the difficult period.

In view of the following key developments for Barclays over the quarter, we have reduced our price estimate for Barclays’ stock from $15 to $13:

  • Sale of BlackRock stake: Barclays completed the sale of its entire stake in BlackRock this quarter for a pre-tax gain of £227 million ($360 million). Our earlier analysis estimated that the BlackRock stake contributed to almost a sixth of Barclays’ value – something which has now been converted as capital after the sale. While this additional capital will help reduce funding costs marginally for the bank in coming periods, it has the net effect of reducing the overall value of Barclays’ share.
  • Impact of LIBOR-related litigation: As a part of its earnings announcement, Barclays revealed that it now faces additional litigation related to its involvement in the LIBOR fixing incident. In our opinion the bank’s $451 million settlement is only the first of more such fines the bank will be subjected to in the months to come. The lawsuits would also increase Barclays’ total litigation expenses. Consequently, we have reduced our forecast for Barclays’ investment banking operations for this year and the next.

See our full analysis for Barclays’ stock

Investment Bank Had A Minor Setback

Barclays made a killing trading debt and equity securities last quarter – something it could not quite replicate this time around with weak economic conditions increasing volatility in capital markets. Trading operations roped in just above £3 billion ($4.7 billion) for the quarter – below the £3.5 billion ($5.4 billion) in Q1. Bond trading, which forms the biggest chunk of these revenue figures, saw the biggest decline from £2.4 billion ($3.8 billion) to £2 billion ($3.1 billion) over the same period.

Margins for the investment banking operations were also hit by the fine Barclays attracted for its involvement in manipulating LIBOR during the 2008 economic recession.

Consumer Banking Operations Show Mixed Performance

Barclays’ geographically diversified consumer banking business reported some ups and downs for the quarter. While its U.K. retail banking business continued its strong performance, its operations in Europe (excluding the U.K.) and Africa showed a decline in terms of outstanding loans and revenues.

PPI related charges continued to be a source of pain for Barclays with the bank setting aside another £450 million ($700 million) as provisions to cover claims related to the PPI settlement reached late last year.

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