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Morningstar | Performance at Barclays Looks Decent If You Turn a Blind Eye to Litigation Charges; FVE Maintained

If one were to exclude litigation and conduct charges, one would see a strong third quarter by Barclays and an even more pronounced year-to-date performance of the U.K.-based banking group. For the the first nine months, profit before taxes came in at GBP 5.3 billion, up 23%, driven primarily by lower impairment charges both in its U.K. and international business as well as lower operating expenses. Including litigation and conduct charges of GBP 2.1 billion, year-to-date performance looks less stellar, however. Returns on average tangible equity only reached 4.9% for the first three quarters. While some may argue that looking past the conduct charges is a better way to gauge future performance, we'd point to the fact that Barclays has, including the charges booked so far this year, racked up GBP 2.3 billion on average in litigation charges since 2015. As such, we do not view these charges as one-offs that should easily be brushed aside when judging performance. That being said, we do think that Barclays has turned a corner on this issue for now. We maintain our fair value estimate of GBX 220 per share and no-moat rating.

On the positive side, the U.K. and international units grew profits before tax to GBP 1.6 billion compared with GBP 1.3 billion the same quarter last year owed to lower credit impairment charges while aggregated income generation was flattish. The U.K.'s profits grew 12% on better net interest income and fee results, while corporate and investment banking dragged slightly as markets could offset lower banking fees but not higher operating expenses. In consumer, cards, and payments, lower credit impairment charges were even more pronounced than in Barclays U.K., spiking profits before taxes to GBP 352 million from GBP 59 million.