LONDON (Alliance News) - Barclays PLC Tuesday reported a fall in pretax profit, as a sharp drop in earnings from the investment bank it is shrinking more than offset better results from its retail banking and credit businesses, and it topped up provisions over alleged foreign exchange manipulation and insurance mis-sold to customers in the UK.
Barclays said that pretax profit fell by 21% to GBP2.26 billion in 2014, from GBP2.87 billion in 2013,
as net operating income, which is the difference between income net of insurance claims and credit impairment charges, dropped by 7% to GBP23.12 billion. It swung to a net loss of GBP174 million, from a GBP540 million net profit in 2013.
Operating expenses fell by 7% to GBP20.43 billion, as it continued to shrink the investment bank, cutting jobs and focusing the business on the US and UK.
Barclays shares closed down 3.2% at 254.30 pence, although the stock remains up 4.9% in the year to date.
Its investment bank, which is undergoing a restructuring aimed at making it leaner and more focused on the UK and US, simplified the range of markets products it offers, all while operating against a backdrop of tougher regulations on the sector as a whole that have depressed returns.
"This has particularly impacted credit and interest rate products, resulting in an income decline across the markets businesses. This decline was partially offset by improved banking performance and significant cost reductions as a result of savings," Barclays said.
Barclays' Africa division also reported a 6% pretax profit decline, due to a fall in the South African rand against sterling over 2014. At constant currency, Africa banking's pretax profit rose by 13% to GBP984 million.
Credit card business Barclaycard, a profit driver for the group, reported a 13% increase in pretax profit to GBP1.34 billion, bolstered by higher income and lower expenses, as customers swelled by four million to 30 million.
The personal and corporate banking division's pretax profit grew by 29%, reaching GBP2.89 billion, with a 1% increase in income supported by a 22% fall in impairment charges for loans that have gone bad, as well as a fall in operating expenses.
Despite the pressures exerted by the investment bank on the group, Barclays beat analyst expectations by reporting a 12% increase in adjusted pretax profit, which strips out billions of pounds' worth of provisions as well a loss on the sale of Spanish businesses and other items, to GBP5.50 billion in 2014 from GBP4.91 billion in 2013.
This was supported by a 9% fall in adjusted operating expenses to GBP18.07 billion, aided by job cuts and other savings. Analysts had forecast a GBP5.33 billion adjusted pretax profit, according to Barclays.
An additional GBP750 million provision for the ongoing investigations and litigation relating to the alleged foreign exchange rigging, as well as another GBP200 million charge to cover the costs of the mis-selling of payment protection insurance, meant Barclays swung to a pretax loss of GBP1.47 billion in the fourth quarter. It was also hurt by a GBP935 million charge for an accounting revision of an education, social housing, and local authority portfolio that is mainly made up of "long-dated fixed-rate loans with strong credit quality".
The provision for PPI and businesses mis-sold products designed to protect against interest rate fluctuations amounted to GBP1.11 billion for the whole of 2014, down from GBP2.0 billion in the prior year.
After setting aside GBP500 million in the third quarter for the foreign exchange scandal, Barclays decided against joining a settlement that saw six rivals fined USD4 billion by UK and US authorities in November last year. The latest charge brings Barclays' total provision for the forex scandal up to GBP1.25 billion in 2014 as a whole. It didn't have a provision for this in 2013.
According to the bank's annual report, the UK's Financial Conduct Authority, the European Commission, the US Commodity Futures Trading Commission, the Securities and Exchange Commission, the Department of Justice, and the New York State Department of Financial Services are investigating "a range of issues" in foreign exchange sales and trading.
The adjusted pretax profit figure for the year also leaves out a GBP446 million loss in 2014 on the sale of Spanish businesses at the start of January, and a similar sized gain on assets acquired with part of the failed bank Lehman Brothers during the financial crisis.
Led by Chief Executive Antony Jenkins, who replaced Bob Diamond in 2012, Barclays has restructured into four main operating divisions, as well as a unit tasked with running down unwanted assets. The aim is to increase returns and spread the balance of the business more evenly from a previous reliance on the investment banking division.
Jenkins' time at the helm has not been without its difficulties, turning to shareholders in a GBP5.8 billion rights issue in the summer of 2013 to bolster the bank's capital and leverage positions, as well as taking an axe to an investment bank that had become too big and costly under a strategy of expansion pursued by his predecessor.
While arguing that Barclays is in a better position now than at any time since the financial crisis of 2007-09, Jenkins said there is still work to be done to restructure, cut costs and improve its capital strength.
"Despite our real progress in 2014, we still have more work to do. We are determined to build on the momentum across the group, to continue to improve returns across our businesses, and to accelerate execution of our plans," Jenkins said.
One year since bonuses paid to investment bankers caused investor unrest and media scrutiny, Barclays cut the bonuses for the division by 24% to GBP1.05 billion, helping to bring down the group pool by 22% to GBP1.86 billion. Jenkins accepted a GBP1.1 million bonus after declining an incentive payment one year ago, part of a total pay package of GBP5.5 million. Total staff costs for the investment bank were down by 9% to GBP4.09 billion. Group staff costs were also down 9% to GBP11.01 billion.
With some equity analysts suggesting that the investment bank could do with further restructuring, Finance Director Tushar Morzaria said Barclays expects investment banking income for the first quarter of 2015 to be "well ahead" of that reported for the fourth quarter of 2014 and "approaching" that of the corresponding quarter of that year.
Speaking at a media conference in the afternoon, Jenkins said that each of Barclays' core businesses, which are those it expects to remain part of the group, must produce the returns expected by management. If required, the chief executive said, he wouldn't hesitate to take further action to improve returns. Barclays' investment bank produced a 2.7% return on average equity in 2014, a fall from 8.2% in 2013, and lower than the group adjusted total of 5.1%.
"The investment bank has to deliver the returns that I and the board require of it. That's an optimisastion of cost, capital and revenue," Jenkins told reporters.
Jenkins also said the group as a whole has made progress on its capital strength, with its fully loaded common equity tier 1 ratio increasing to 10.3% from 9.1% at the start of the year, driven by reductions in risk-weighted assets and better capital levels. Also taking into account the sale of the bank's Spanish business, the CET1 ratio would have increased to 10.5%. Barclays is targeting a CET1 ratio of above 11% in 2016.
Its leverage ratio, a broader measure of financial strength, increased to 3.7% from 3.5% at the end of September, moving closer to the bank's 4% target for 2016.
The dividend for the year was kept flat at 6.5 pence per share, but Barclays said it is continuing to target a 40-50% payout ratio.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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