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Barclays (BCS) Q1 Pretax Earnings Fall on Revenue Slump

Barclays PLC’s BCS first-quarter 2016 pre-tax earnings of £793 million ($1.14 billion) declined 25% year over year, depicting a challenging industry backdrop. Notably, net income from continuing operations was £545 million ($784.8 million), up 3% from the year-ago quarter.

A challenging industry backdrop had adverse impact on Barclays’ investment banking income and trading revenue. These were the primary reasons for the revenue decline, which was partially offset by a stable net interest income. Further, a rise in credit impairment charges was an undermining factor. However, decline in operating expenses continued to act as a tailwind.

Attributable profit for the quarter stood at £433 million ($623.5 million), down 7% from the prior-year quarter. This reflected a decline in profit from discontinued operation.

Performance in Detail

Net operating income was £4.60 billion ($6.62 billion), down 13% year over year.

Total operating expenses totaled £3.83 billion ($5.52 billion), down 7% from the year-ago quarter. This reflected an absence of several notable items recorded in the prior-year quarter, partly offset by higher restructuring charges and implementation costs associated with the structural reform plan.

Owing to its restructuring plan, management reiterated its operating expense (excluding conduct and litigation and other notable items) in 2016 for the Core division to be £12.8 billion.

Cost to income ratio was 76%, up from 73% in the year-ago period.

Segment Details

Barclays UK: Profit before tax came in at £704 million ($1.01 billion), down 17% year over year. The fall was due to higher operating expenses, partially offset by a fall in credit impairment charges and relatively stable net operating income.

Barclays Corporate & International: Profit before tax came in at £1.03 million ($1.48 billion), surging substantially from the prior-year quarter. The growth reflected lower operating expenses and almost stable net operating income, partly offset by an increase in credit impairment charges.

Head Office: Loss before tax was £123 million ($177.1 million), compared with profit before tax of £12 million ($18.1 million) recorded in the prior-year period.

Barclays Non-Core: Loss before tax amounted to £815 million ($1.17 billion), deteriorating from a loss of £310 million ($468.1 million) incurred in the year-ago period.

Balance Sheet and Capital Ratios

Total assets as of Mar 31, 2016 came in at £1,249 billion ($1,798.6 billion), up 12% from the Mar 31, 2015 level. As of Mar 31, 2016, Common Equity Tier (“CET”) 1 ratio was 11.3%.

Total risk-weighted assets were £363 billion ($522.7 billion) as of Mar 31, 2016.

Our Take

We expect Barclays’ diversified business model and sound financial position to consistently support its overall growth in the future. Further, the bank’s expense reduction as well as restructuring initiatives is expected to improve profitability over the longer term.

However, we believe litigation headwinds from regulatory investigations will remain a matter of concern. In addition, muted revenue growth, tepid global economic recovery and a stringent regulatory landscape will continue to weigh on the company’s near-term performance.

Barclays currently carries a Zacks Rank #5 (Strong Sell).

Among other foreign banks, Deutsche Bank AG DB is scheduled to announce results on Apr 28, while UBS Group AG UBS and HSBC Holdings plc HSBC are slated to report on May 3.

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