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LONDON (Alliance News) - Barclays PLC on Thursday missed market expectations and cut guidance for 2016, as its adjusted pretax profit fell in the third quarter, with larger losses in the non-core businesses that Barclays is winding down more than offsetting stronger earnings in three of its four main operating businesses.
Barclays shares were down 4.7% at 241.24 pence in early trade, the worst performing in the FTSE 100.
Barclays raised its 2016 core cost guidance by GBP400 million. Previously, Barclays had guided cost of "less than GBP14.5 billion". The new costs relate to implement structural reforms, such as the establishment of an intermediate holding company in the US and, later, ring-fencing its retail bank in the UK from its other activities. The structural costs are expected to cost GBP1.1 billion in total from 2015 as the reforms are implemented over the coming years.
The bank cut its core return on equity target for 2016 to 11% from the 12% previously guided, a result of the 8% banking surcharge unveiled in the UK in the summer and higher costs of structural reform.
The FTSE 100 bank is undergoing a heavy period of surgery. British retail banker Antony Jenkins was fired in July after the board lost faith in him as the right chief executive to take the bank forward, and US investment banker Jes Staley was named as his successor on Wednesday. The rundown of non-core assets continues, as Barclays looks to improve shareholder returns.
Chairman John McFarlane said that Barclays has three priorities, namely to focus on its core business, activities, generate shareholder value and instill a "high performance culture" with "strong" ethical values. He said that the bank now has a "forward agenda" that has been discussed and agreed with Staley.
"We will update the market on our plans for structural reform after we have agreed them with the regulator. Now that we have a new CEO in place, we will provide further updates on future direction at the full-year results" early in 2016, McFarlane said.
Near the top of its list of concerns is the investment banking arm, now being shrunk due to low returns and a capital-hungry business model. Its glory days of being a European rival to Wall Street's finest are in the past. In the words of Staley on Wednesday, Barclays must now "complete the necessary transformation and repositioning of the investment bank to a less capital intensive model".
The investment bank's third-quarter pretax profit increased by 12% year-on-year to GBP317 million, as higher income from equities and macro activities offset a fall in credit to push up markets income. Banking income rose due to higher investment banking fees and lending activities. Crucially, the investment bank's return on average tangible equity - an important measure of profitability - was up to 5.5% from 3.3%, while its cost to income ratio - a measure of efficiency - improved slightly to 81% from 83%.
The division's returns and efficiency ratios lagged the broader group, where the adjusted return on average tangible shareholders' equity was 6.7% and the cost to income ratio was 69%.
"The investment bank has seen weaker market conditions in October in comparison to October 2014. However, it is too early to make any specific comment on fourth-quarter performance," Barclays said in a statement.
The investment banking arm is one of four main operating divisions at the group, sitting alongside payments business Barclaycard, personal and corporate banking operations, and an African banking business.
For Barclaycard, which is growing fast in the US, pretax profit rose by 41% on the year before to GBP508 million, while personal and corporate banking improved by 9.0% to GBP855 million. The Africa banking division's pretax profit fell by 8.0% to GBP251 million.
The four core divisions' overall pretax profit increased by 1.0% to GBP1.76 billion, while the non-core operations' pretax loss widened to GBP337 million from GBP157 million. That gives an adjusted pretax profit of GBP1.43 billion, a miss against company-compiled consensus forecasts of 14 analysts of GBP1.65 billion.
The adjusted figure, which strips out the effects of own credit, provisions for fines and compensation due to customers as well as other gains and losses, fell from GBP1.59 billion a year before.
Barclays' third-quarter statutory, or unadjusted, group pretax profit fell by 30% to GBP861 million, a result partially due to the fall in the adjusted figures.
The fall came as Barclays booked GBP270 million of new provisions to settle two residential mortgage-backed securities claims and GBP290 million to cover the cost of compensating UK customers after an internal review into the rates provided on foreign exchange transactions between 2005 and 2012. There also was a GBP201 million loss on the sale of the bank's Portuguese retail business from its non-core operations.
Net profit amounted to GBP417 million in the three months to September 30, compared with GBP379 million the corresponding quarter the prior year. A third interim dividend of 1.0 pence will be paid on December 11, flat on the year before. Barclays had said at the half-year stage that it plans to pay a full-year dividend of 6.5p for 2015 as a whole, flat on 2014.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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