Barclays Plc (BARC) jumped the most in almost three months after the U.K.’s second-largest lender returned to profit, a sign Chief Executive Officer Antony Jenkins’s overhaul may be starting to pay off.
Barclays led the gainers on Britain’s benchmark FTSE 100 Index, advancing 4.2 percent to 228.40 pence in London, the biggest increase since May 8. The stock has declined 16 percent this year, the worst performance of Britain’s big five lenders.
Investors and analysts looked beyond a 900 million-pound ($1.5 billion) provision for improperly sold insurance and a 50 percent drop in profit at the investment banking arm to focus on Jenkins’s effort to reduce costs and shrink the balance sheet. The 53-year-old, who took over from Robert Diamond in August 2012 after the bank was fined for rigging the London interbank offered rate, is seeking to curb Barclays’s reliance on the investment banking operation his predecessor built.
Carla Antunes-Silva, an analyst at Credit Suisse Group AG (CSGN) in London with a neutral rating on Barclays, said today’s results marked a “good start” to the restructuring.
Risk-weighted assets at Barclays’s bad bank fell 20 percent in the first half to 87 billion pounds, near to the bank’s 80 billion-pound target for the year-end. Costs as a proportion of income fell 3 percentage points to 82 percent.
Net income was 161 million pounds in the second quarter compared with a loss of 168 million pounds in the year-earlier period, helped by job cuts at the investment banking arm and a 42 percent decline in bad loans, the London-based lender said.
“We committed to simplify, focus and re-balance the group to deliver higher and more sustainable returns across the cycle,” Jenkins, 53, said in a statement. “We are making encouraging progress.”
In the first half, pretax profit fell 7 percent to 3.35 billion pounds, beating the 2.69 billion-pound average estimate of 13 analysts compiled by Barclays. Adjusted operating expenses dropped 9 percent to 8.88 billion pounds, including costs to achieve Jenkins’s Transform program of 494 million pounds, with litigation and conduct-related charges of 211 million pounds.
The bank cut about 5,000 jobs this year, with half of them at the investment bank, Finance Director Tushar Morzaria said on a conference call with analysts today. Headcount is at the lowest since 2007, helping cut operating expenses by almost 1 billion pounds in the first half, according to the statement.
As part of his overhaul, Jenkins set up a bad bank to dispose of 115 billion pounds of assets, including complex derivatives from the lender’s fixed-income, currencies and commodities unit and the European consumer arm.
Losses at the non-core business, led by Eric Bommensath, fell 25 percent to 464 million pounds from 619 million pounds a year ago. Credit impairment charges and other provisions were at 149 million pounds, down from 556 million pounds.
At Royal Bank of Scotland Group Plc, first-half profit almost doubled to 2.65 billion pounds, with the bank reporting its second consecutive profitable quarter. CEO Ross McEwan reported on July 25 that the bank has been shrinking its bad bank, set up last year to house the riskiest assets.
At the investment bank, income dropped 18 percent to 4.26 billion pounds, driven by a 22 percent drop in markets revenue as fewer clients traded in cash equities, rates and currencies. Analysts had forecast a drop of at least 20 percent at the unit, according to the median of six surveyed by Bloomberg News.
July could be the weakest month of the year so far for the investment bank, Morzaria told analysts.
“The numbers are clearly much better than expected, with revenues and investment banking less bad than estimated and out-performance versus market expectations on costs and impairments,” said Ian Gordon, an analyst at Investec Ltd. in London, who recommends buying Barclays shares.
Barclays took a 900 million-pound charge to cover the costs of compensating clients improperly sold loan insurance compared with 1.35 billion pounds a year ago. That brings total payment-protection insurance provisions to 4.85 billion pounds. It didn’t set aside additional money for interest-rate hedging products redress.
The bank’s leverage ratio, a measure of how much capital it has compared with the total size of assets, rose to 3.4 percent from 3 percent at the end of 2013, while the common equity Tier 1 ratio, a measure of financial strength, increased to 9.9 percent from 9.6 percent in the first quarter.
“The shares have been terrible performers of late so the profit beat and good progress on capital should come as a welcome relief to the market,” said Gary Greenwood, an analyst at Shore Capital, who has a buy rating on Barclays’s shares.
The bank is fighting a U.S. lawsuit alleging it falsified marketing materials to mask the role of high-frequency traders in its dark pool, a private-trading platform. Barclays is seeking to have the dark pool complaint thrown out of court.
“There’s been no spillover into our other businesses from the dark pool issue,” Jenkins said on a call with analysts. “That’s the only place we’ve seen a diminution in volume.”
It’s also said to be among banks negotiating a settlement with Britain’s markets regulator over a currency-rigging probe, according to people familiar with the matter. Barclays has said it’s cooperating with the investigations.
Barclays said today its two-year non-prosecution agreement with the U.S. Justice Department, begun in June 2012 as part of its Libor settlement, was being extended by a year because of a probe into alleged currency-market manipulation. The DoJ will use the additional time to decide whether any of Barclays’s currency market trading activities broke U.S. laws. The extension doesn’t imply any wrongdoing, the CEO said today.
The dividend remains at 2 pence a share for the first half, Barclays said. The board approved an interim dividend of 1 pence per ordinary share to be paid on September 19.
Jenkins said today he remains committed to his dividend policy and would like to increase payouts “at some point.”
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