Barclays Plc Misses Q4 Estimates, Launches Strategic Review

Barclays PLC (LON:BARC) (NYSE:BCS) reported Q4 12 adjusted pre-tax profit of £1.1bn versus consensus of £1.2bn, some 6% light largely in the UK retail bank and corporate centre. Total income (net claims) was £29.0bn. Costs were £18.5bn  and bad debts were £3.6bn.

Barclays Plc Misses Q4 Estimates, Launches Strategic Review

The investment bank adjusted Q4 12 pre-tax profit came in at £858m versus consensus of £798m. Total investment banking revenues fell 2% sequentially versus consensus expectations of down 7%. Fixed income was down 8% sequentially, in line with our expectations, and showed very good resilience versus peers. Where the numbers were a little light was in the UK retail division (pre-tax of £326m) with revenues down 4% sequentially explained primarily by provisions taken to remedy historical interest charges incorrectly applied to customers, which sounds one-off in nature. The bonus grant for 2012 was down 16% year on year whereas total group revenues rose 2% so compensation discipline was evident with a 38% group compensation ratio of 38% vs 42% in 2011 and a ratio in the mid 30s being seen as sustainable medium term. The final dividend was 3.5p bringing the DPS to 6.5p for the full year, slightly ahead of consensus of 6.2p.

There is a good start to the year comment across all divisions. TBV came in at GBp373 but this excludes the IAS19 impact from 1 January of some 20p so 353p ex this. Barclays PLC (LON:BARC) (NYSE:BCS) reported a Core Tier 1 of 10.9%. RWAs were £387bn. The outlook statement was supportive with a good start to the year across the group.

The key points of the Strategic review are:

1) The ROE target is set in excess of the cost of equity of 11.5% by 2015.

2) The Strategic review announced net cost cuts of £1.7bn vs the press reports of £2bn (FT, 10 February 2013) but Barclays did give an absolute cost base target of £16.8bn by 2015 excluding costs to achieve which is supportive. The costs to achieve are relatively high at £2.7bn over 2013-2015 vs £1.7bn cost reduction and may be related to Europe as half of the staff reduction of 3,700 is in Europe. The cost income ratio target is in the mid 50s.

3) Barclays PLC (LON:BARC) (NYSE:BCS) is targeting B3 RWAs of £440bn by 2015 in line with forecasts with somewhat more mitigation than originally expected and Barclays has already hit its end 2013 B3 RWAs target end 2012 which meant that the core T1 came in at 8.2% pro forma B3 in line with forecasts in spite of the one-off charges on PPI and Interest rate hedging redress.

4) On the B3 core T1 there is an expectation of reporting a CET1 above 10.5% in 2015 but this is on a transitional basis rather than pro forma basis.

5) From 2014 Barclays aims to accelerate the progressive dividend policy to target a payout ratio of 30% over time. Consensus for 2015 is on a 22% payout ratio

Barclays PLC (LON:BARC) (NYSE:BCS) will target a >11.5% ROE. It will cut 3700 jobs with 1800 and 1900 coming from the IB and Europe respectively; targets absolute costs of £16.8bn and RWAs of £440bn by 2015, this is £2.6bn and £50bn lower than our current forecasts. We had hoped for £1bn and c. £30bn respectively, so the outcomes are a lot better than hoped.

Barcap (£4.1bn), Barclaycard (£1.5bn) and UK Retail (£1.5bn) contributed 99.9% of Group Adj PBT of £7.0bn. Corporate (£0.6bn) saw a meaningful recovery (+170%) with lower costs/impairments in Europe. Africa (-44%) was weak with elevated impairments. Losses in Europe RBB (-£0.2bn) were stable.

Restructuring charges of GBP 2.7bn Restructuring charges will total GBP 2.7bn, not out of line with what peers have reported but for a much smaller degree of RWA reduction (GBP 28bn). Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) has a EUR 4.5bn restructuring charge, but it had more balance sheet restructuring. Restructuring costs are c.15% of Barclays’ cost base.