Why Did Barclays Swing To A Loss In Q3 2019?

December 4th, 2019 by Trefis Team
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Barclays (NYSE: BCS) reported a net loss of £292 million in Q3 2019, which compares to a net profit figure of £1 billion in Q2 2019. The drastic reversal in fortunes for the British banking giant can be attributed to a pre-tax charge of £1.4 billion from additional provisions for Payment Protection Insurance (PPI) (PPI, also known as credit insurance, is an insurance product that covers debt repayment for customers). Notably, the bank’s management stated that this figure accounts for nearly two-thirds of the total claims made even as the bank works through the validity of each claim. This means that there is a possibility that the bank may have to set aside additional cash for PPI in the current quarter.

Trefis breaks down the reasons for Barclays’ net loss during the quarter in detail as a part of the interactive dashboard – Why Barclays Reported A Loss of £300 Million In Q3 2019 Versus A Profit Of £1 Billion In Q2 2019? parts of which are highlighted below.

A detailed analysis of factors impacting Barclays’ performance during the quarter :

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#1 Net Income Took A Hit Of More Than £1.3 Billion

  • Barclays’ net income dropped from £1.03 billion in Q2 2019 to a net loss of £292 million in Q3 2019, marking a decline of £1.33 billion during the quarter.
  • This decrease in profitability can be attributed to a £1.3 billion increase in total expenses, partially mitigated by a £22 million increase in total revenues.

 #2 Barclays’ Total Revenues Remained Flat

  • Barclays’ revenue increased by just £22 million during the quarter as a result of the £85 million increase in net interest income as well as lower credit impairment charges of £19 million.
  • However, the increase in net interest income was offset by a £82 million decline in Net fee, commission and other income.

 

#3 Total Expenses Swelled 34% Due To One-Time Charges Related To Additional Provision For PPI

  • Total expenses increased by £1.3 billion for Q3 primarily as a result of £1.4 billion charges related to the additional provision for Payment Protection Insurance, partially offset by a £208 million decrease in operating costs.
  • The primary reason for this surge was an increase in Litigation and conduct expenses, going up from £53 million in Q2 2019 to £1.5 billion in Q3 2019.
  • However, Barclays’ operating costs declined by nearly 6%, falling from £3.5 billion in Q2 2019 to £3.3 billion in Q3 2019.
  • Additional details regarding other major expense items that moved during the quarter are available in our interactive dashboard.

We expect Barclays’ adjusted EPS for full-year 2019 to be around £0.65 (with each U.S. ADR for the company representing 4 common shares). Using this figure with our estimated forward P/E ratio of 11.6x and a GBP-USD exchange rate of 1.3, this works out to a price estimate of $10 for Barclays’ stock – roughly 15% ahead of the current market price.

 

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