More on Barclays
Barclays
Barclays’ full year results were driven by a strong performance by Barclays Capital. Pretax profits at Barclays Capital were up 25% to £1,042m, while business banking recorded a growth of 9% to £1,347m. Retail banking pre tax profits declined by 1% to £1,127m. Overall pre-tax profits for the full year were up 20% at £4,603m, slightly ahead of forecasts.
UK business banking has performed better than retail banking which has been affected by pressures within the mortgage business. Contributions from two stockbrokers acquired during the year (Gerrard and Charles Schwab Europe businesses), improved market conditions, new products and higher levels of activity have boosted performance in the private client business. Barclaycard has performed better due to increases in average loan balances but margins have weakened. Profits were also helped by a £256m reduction in provisioning (accounting for almost 37% of the growth in operating profits) which was attributed to a fall in credit risk.
Cost growth was ahead of income growth, not a good sign, which was attributable to higher volumes of lending (meaning interest margins have shrunk, acquisitions (Gerrard) and investment spend - presumably higher depreciation costs, which means that investments in assets are not generating the expected level of returns. Interest margins were 51% compared to 53% last year.
Barclays earnings have improved but quality of earnings appears to have suffered, meaning that income growth came from non-core and and one-off sources, not the core UK banking business.
Margins all round seem to be under pressure. The provisions charge for has fallen (despite the growth in the loan book and the poor trading environment), we are concerned that it may indicate a less cautious approach brought about by increased cost pressure elsewhere. Total provisions (£2,800m as at December 2004) are down 8.5% on last year, despite a 12.7% growth in the loan book. Total provisions covered 1.45% of the loan book, down from 1.65% as at the half year and 1.78% as at the previous half year. Coverage of loans classified as ‘non performing’ was slightly lower at 70.4% (Dec 2003:71.5%). The Tier 1 capital ratio has weakened to 7.6% from 7.9% last year and 8.2% in 2002.
The overall performance has been reasonable but not exciting. Acquisitions could drive performance but although the bank is in discussion with the Absa Group, a leading South African bank, it has yet to receive regulatory approval and the time frame for approval is unknown.
Barclays currently trades at 594p or 10.2×, prospective in line with the sector. The prospective yield of 4.4% is quite good and with dividend cover of 2.1× it looks fairly safe.
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