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(Alliance News) - Barclays PLC on Friday reported a sharp drop in quarterly profit, as the lender took a mammoth payment protection insurance charge but this hit was partially offset by a strong performance from its sometimes maligned investment bank.
Shares in the FTSE 100-listed lender were 1.1% higher in London in mid-morning trade on Friday at 168.28 pence each. In the year to date, the shares are up 13%, currently trading at their highest point in 2019. Barclays stock dropped to its lowest price, of 136.16p, in late August amid political protests in Hong Kong and Brexit uncertainty in the UK.
In the three months to September 30, the lender recorded pretax profit of GBP246 million, 83% lower than the GBP1.46 billion posted a year earlier. Excluding litigation and conduct charges, third-quarter pretax profit rose 18% to GBP1.81 billion.
The sharp quarterly drop was attributed to a GBP1.4 billion payment protection insurance provision. Total operating expenses rose 42% to GBP4.86 billion from GBP3.43 billion, with litigation & conduct charges jumping to GBP1.57 billion from GBP105 million the year before.
Barclays' quarterly operating expenses excluding litigation costs were reduced by 1.2% to GBP3.29 billion.
In September, the lender warned of an "exceptional" level of PPI claims in the days leading up to the Financial Conduct Authority's deadline of August 29. To September 30, Barclays has recognised GBP11 billion of cumulative provisions.
Barclays said it still had 2 million claims requests at various stages of processing when the third quarter ended. The lender holds a current valid claim assumption rate of 30% - which is at the bottom end of its historical valid claim rate of between 30% to 40%.
As a result of the increased costs, the cost-to-income ratio worsened considerably to 88% for the quarter from 67% the year before.
AJ Bell Investment Director Russ Mould commented: "Barclays has rather given to shareholders with one hand and taken away with the other in this morning's third quarter update.
"The numbers themselves are actually somewhat better than expected despite a further PPI provision (bang in the middle of the guided level). Like its peers the company appears to be a victim of a late surge in claims as some customers left it until close at the August deadline to act."
In better news for the UK lender, third-quarter net interest income rose 2.5% to GBP2.45 billion from GBP2.39 billion the year before. Total income grew 8.0% to GBP5.54 billion.
"These represent another set of consistent and resilient results, and they show the benefits of our diversified model - one which allows us to weather today's macro headwinds, and grow our businesses and profitability over time," Barclays Chief Executive Jes Staley said.
The bank finished September with GBP313.3 billion in risk-weighted assets, down 1.8% over the three month period, but slightly higher over the course of 2019.
Barclays ended the quarter with a CET1 ratio of 13.4%, flat on the previous quarter, and up from 13.2% at the start of 2019.
Hargreaves Lansdown analyst Nicholas Hyett commented: "It's just one quarter, but this is exactly the picture CEO Jes Staley wants to paint – even if the final round of PPI compensation is muddying the water.
"A resilient UK bank is cutting costs and keeping bad loans to a minimum, generating a reliable income stream. Meanwhile the corporate and investment bank is putting the icing on the cake with lower capital intensity fee income and increasing corporate loans. The combination is generating a healthy return on shareholders' capital."
Barclays Corporate & Investment Bank, which sits within Barclays International, recorded a profit of GBP882 million in the third quarter, 77% higher year on year and broadly flat compared to the previous quarter. The corporate loan book recorded 2.7% growth to GBP95.8 billion.
Fixed Income, Currencies & Commodities income in the quarter was up 19% on year before at GBP816 million with Equities income rising 4.9% to GBP494 million - total Markets income was up 13% to GBP1.31 billion.
The other half of Barclays International - Consumer, Cards & Payments, which covers the US retail and commercial banking arm - reported a 28% slip in profit to GBP255 million. The unit's loan book, however, recorded 8.2% year-on-year growth to GBP42.3 billion.
Barclays UK, the domestic retail and commercial bank, posted a quarterly loss of GBP687 million compared to a GBP740 million profit the year before, attributed to the large PPI provision.
The unit's net interest margin slipped to 3.10% compared to 3.22% a year before but improved on the 3.05% mark seen in the second quarter. The domestic unit's loan book grew 3.5% year on year to GBP193.2 billion.
Barclays UK total income was broadly flat at GBP1.85 billion - with Personal Banking recording a slight rise, offset by a slight dip from Barclaycard Consumer UK but with Business Banking income stable.
Richard Hunter, Head of Markets at interactive investor said: "For the most part, Barclays remains on track in delivering its ambitious and complicated transformation.
"The bank had previously stated that cost control was a priority for this year, and a stable 62% cost-to-income ratio, despite continuing investment in its digital presence, is a worthy achievement. Meanwhile, the capital cushion remains within its desired range, and the Consumer, Cards & Payments business has impressed again, with a near 16% return on tangible equity, with targets to grow the US business further in place."
In the nine months to September 30, pretax profit for Barclays as a whole improved 4.5% year on year to GBP3.26 billion with total income growing 1.7% to GBP16.33 billion.
The lender's growth in 2019 has been driven by the impressive performance of its investment bank, which has seen profit grow 3.6% to GBP2.60 billion - pushed higher by a 15% jump in income from its FICC division.
Return on tangible equity in 2019 to date sits at 5.1%, up from 4.9% in the same period the year prior.
Looking ahead, Staley said these results show Barclays is on track to achieve its target of a group return of greater than 9% for 2019 and is continuing to target an RoTE of greater than 10% in 2020
"Though we acknowledge that the outlook for next year is unquestionably more challenging now than it appeared a year ago, in particular given the uncertainty around the UK economy and the interest rate environment," added Staley.
He continued: "Despite the impact to profitability of the GBP1.4 billion PPI provision, our CET1 ratio continues to be within our target, which is revised to about 13.5%, now that our operational RWAs are accounted for more consistently with UK peers."
AJ Bell's Mould said the market is taking this caution in stride.
"First, most people felt this target would prove a stretch anyway so weren't hanging their hats on the bank hitting the 20% level," Mould said.
Mould continued: "Second, its excuses for falling short look pretty cast iron and would not be a big surprise to investors. Interest rates are no longer expected to go up, and this puts pressure on the amount banks can charge to lend money. While global and domestic economic and political uncertainty remains elevated."
Hyett added: "Among the biggest challenges facing the banking industry is a stubbornly low interest rate environment, and Barclays is no exception. Low interest rates push down what banks can charge on loans, but interest rates on savings are already close to their lower limit. That squeezes what banks can make on borrowing from one and lending to another. With more mature loans rolling off all the time, and net interest margins deflating as a result, that pressure will only build as time goes on."
By Paul McGowan; paulmcgowan@alliancenews.com
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