Barclays slips to second quarter loss after GBP700m PPI charge

Barclays produced a mixed set of interim with some profits better and some worse than expected due in part to putting aside an extra £700m for PPI mis-selling compensation, while its pensions black hole more than doubled.

With the second quarter being the first period since the FTSE 100 bank sold most of its African arm and folded its non-core bank back into the main group, a drop-off in non-core losses helped the group report a first-half profit before tax jump 13% to £2.34bn as net interest margin (NIM) improved 10 basis points to 3.69%, with net interest income increasing 2% to £3.05bn.

However for the second quarter a £1.48bn loss before tax was reported, dented by the exit from Africa and PPI provision.

Barclays declared an interim dividend of 1.0p per share and confirmed it will pay out 3p for the full year, as previously pledged.

It swung to a loss per share of 6.6p from last year's earnings of 6.9p, though this included a £1bn write-down from Barclays Africa and £1.4bn loss on the sale of the 33.7% Africa stake.

Excluding though EPS for continuing operations was up 18% to 7.1p and excluding the loss from the Africa sale and PPI charges, earnings per share were 11.8p

The impact of the Africa sale meant there was a loss after tax in respect of discontinued operation of £2.2bn, which the bank put down to the 'recycling' of currency translation reserve losses on the income statement, though the non-core loss before tax shrank to £647m from £1.9bn.

Credit impairment charges increased 17% to £1.02bn, driven by increased impairments in the Consumer, Cards and Payments arm and an increase in underlying delinquency trends in US cards.

Group return on tangible equity came out 8.1%, with UK RoTE down to 4.6% from 13.6% a year ago, while the International arm saw RoTE only waned to 12.4% from 14.3%. The CET1 capital ratio was solid and better than expected at 13.1%.

Chief executive Jes Staley set a new target of achieving a greater than 10% group RoTE.

Income increased 3% at Barclays International, with growth across both Corporate & Investment Banking arm and Consumer, Cards and Payments, though Barclays UK income softened 2% versus a strong period last year when it gained from the disposal of Visa assets.

Staley hailed the completion of two key planks of his strategy ahead of schedule, saying the Barclays Africa disposal allows Barclays to apply for regulatory deconsolidation, which is expected in 2018.

"We have permission to apply proportional consolidation to our reduced shareholding, which means that our CET1 ratio stands at 13.1% today, within our end-state target range. We will realise a further circa 26bps uplift resulting from the sale," he said, as well as noting the completion of the accelerated non-core rundown to £23bn was below the target of £25bn.

"Accomplishing both of these milestones marks an end to the restructuring of the Barclays Group, and brings forward the date when our shareholders can benefit from the full earnings power of this business."

Although the business is simplified and capital ratio is on target, he acknowledged that work remained to be done to move on from conduct issues, with the PPI as well as investigations from UK and US regulators.

The pension scheme deficit also more than doubled to £7.9bn from £3.6bn at the last funding valuation in 2013, due mainly to falling gilt yields, while Barclays has paid £620m payments so far in 2017.

This will require Barclays to pay an extra £4.5bn into the pension scheme over an extended period of 10 years.

REACTION AND ANALYSIS

Barclays shares fell 1.5% in early trade on Friday.

Broker Shore Capital said the interim results were worse than expected due to weaker than anticipated income performance and a further material PPI, with the statutory PBT of £2.34bn being below the consensus £2.95bn forecast.

Excluding one-off amounts, adjusted PBT was £2.85bn, so still weaker than expected, which ShoreCap noted was primarily due to lower than anticipated income performance with costs and impairments both broadly in line with expectations.

The £2,195m loss on Barclays Africa, partly offset by the recycling of currency translation losses from reserves, "appears to be larger than we expected".

Barclays has reported a £1.2 billion loss or the first half of 2017, thanks to a £1.4 billion write down from its sale of Barclays Africa Group Limited, a £1.1 billion impairment of its holding in the African business, and a £700 million PPI charge.

Investec's Ian Gordon called the numbers "messy" and said it was "hard to take too many incremental positives" beyond regulatory capital being better than expected, with the "theoretical" underlying profit only beating consensus due to a £109m Vocalink gain, with fixed income, currencies and commodities performance again "poor".

Disappointment in underlying revenues, which are a 3% miss on consensus forecasts, was primarily reflecting further weakness within investment banking, driven again by macro where revenues fell 7% on the prior quarter and 25% on the year, which is "particularly poor" in the context of specific underperformance in the first quarter 2017 and continued FX support for the year on year comparatives, notwithstanding weakness already seen from most US peers.

He said the 3p “token” dividend in 2017 was unsurprising given prior guidance, but looking ahead he is optimistic as 2017 "should be the peak year for both non-core losses and restructuring charges", so if regulatory/conduct is not too bad, he expects reported earnings and dividends to "meaningfully recover in 2018 and beyond".

However, Gordon felt the shares are "too cheap" at 0.7 times current tangible net asset value of 284p, leading him to reiterate his 'buy' recommendation and 245p target price.

Analyst Laith Khalaf at Hargreaves Lansdown said it was a "perplexing" set of results as "the bad bank is getting better, but the good bank is getting worse".

The core business saw a 25% fall in PBT to £2.99bn, with Barclays UK responsible for most of the fall as profit fell 41% from to £634m thanks to PPI charges and the prior year’s Visa boost.

But he said the completion of the bank's restructuring is a "significant milestone", but now Barclays is in the shape envisaged by management, "the pressure is on to perform".

"To that end its figures for 2017 are far from convincing, with the core bank floundering, and progress actually coming from the non-core. The market will be hoping for a bit more positive news in the remainder of the year, though conduct issues may well overshadow the bank’s performance.," he said.