EUR 850.00 For Business Accounts Only

Morningstar | Mixed Operating Performance and Litigation Charges Hurt First-Half 2018 Results for Barclays

Higher litigation charges paired with weak operating results did not go well for no-moat Barclays in the first half of 2018. Despite better consumer and business income generation in the U.K., up 4% and 2%, respectively, year over year, weaker personal banking (down 4%) due to one-offs and structural reforms between U.K. and international meant that income from Barclays UK declined marginally by 1%. Profit before tax grew to GBP 826 million for the first half compared with GBP 634 million last year, although this was the result of a GBP 281 million decrease in litigation and conduct charges. The international business increased pretax profits by 4% to GBP 2,710 million, helped by improved macroeconomic forecasts in the U.S. lowering credit impairment charges, while a slight improvement in operating expenses (down 1%) could not offset weaker income generation (down 3%). In sum, Barclays recorded GBP 922 million in profits after tax, a full 41% lower than first-half 2017 results, owing to significantly higher litigation charges (GBP 2 billion versus GBP 0.7 billion last year). We maintain our fair value estimate of GBX 220.

With the firm having reached a settlement with the U.S. Department of Justice related to residential-mortgage-backed securities sold between 2005 and 2007 in the first quarter of this year, and with no further payment protection insurance, or PPI, provisions booked in the second quarter, we believe the worst is behind Barclays. Management believes that current provisions (GBP 1.4 billion) for PPI charges are appropriate, which we do not disagree with. However, provisions are based on customer complaints received, which can lead to volatility in provisions, as was seen this quarter at U.K. peer Lloyds. Ultimately, this issue will demand attention until the closing of complaints at the end of August 2019.