Barclays' Income Falls: Morningstar's View
Barclays'net income drops 35% year over year, but beats our expectations.
Overall, we continue to be pleased with how Barclays is navigating the ongoing market dislocation. Despite the write-downs, Barclays' return on equity was 14.9% during the half, well ahead of our 12% cost of equity. Credit quality deteriorated during the half, as economic growth slowed worldwide, but not nearly as much as we feared it might. Provisions for loan losses increased by GBP 471 million, to 0.68% of loans, compared with 0.60% a year-ago. Although the U.K. economy slowed, credit quality deteriorated only slightly, with mortgages 90-plus days in arrears increasing to 0.97% of loans, compared with 0.91% at the end of 2007. Similarly, U.K. construction and property loans in arrears increased to 0.44%, compared with 0.41% at the end of 2007. Most of the credit quality deterioration came from commercial and property loans in Spain. There, provisions for loan losses increased to GBP 103 million, compared with just GBP 32 million a year ago. Although we're worried about this deterioration, we're comforted to know that this category of loans makes up only 16% of Barclays' Spanish loan book. While our valuation assumes that loan losses will continue to increase, our fears are moderated by conservative lending policies. The average loan/value ratio on its mortgage portfolio is a very low 35% in the U.K. and 45% in Spain.