Barclays' Income Falls: Morningstar's View

Barclays'net income drops 35% year over year, but beats our expectations.

Erin Davis | 08-08-08 | E-mail Article

Barclays' (link will open in a new window) attributable net income for the first half was GBP 1.7 billion, down 35% over the year-ago half. Its financial statements for the half do not reflect the results of the GBP 4.5 billion capital increase that the bank completed in July. Post capital increase, Barclays' Tier 1 capital ratio was a solid 9.1%. Barclays' results were slightly ahead of our expectations and we're standing by our fair value for now. Nearly the entire drop in Barclays' income was caused by the net GBP 1.1 billion of write-downs that it took on its securities exposure during the half, which included a gain of GBP 0.85 billion on the bank's own debt; write-downs were not material in the year-ago half. Excluding these losses, income growth was fairly strong, with profits increasing in 7% in U.K. banking, 30% in credit cards, 10% in Western Europe, 10% in South Africa, and 5% in wealth management. Profits fell 13% in emerging markets as Barclays continued to invest heavily in growing its business, and 32% in asset management as Barclays used its own funds to support liquidity products.

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.

You can contact the author via this feedback form.
© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookie Settings        Disclosures