Don’t be lured in by Q1 profits at Barclays plc & Standard Chartered plc

Why Barclays plc (LON: BARC) and Standard Chartered plc (LON: STAN) aren’t out of the woods just yet.

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First quarter results at Barclays (LSE: BARC) were slightly under analyst estimates but pre-tax profits of £793m were still cheered by the market. However, this quarter shows there are still significant problems that will likely keep shares trading at their current depressed valuation for the foreseeable future. The first of these is the bank’s non-core assets, which fell from £54bn to £51bn year-on-year when measured by risk-weighted assets. Although selling off some wealth management and retail operations brought non-core assets down, losses widened from £310 this time last year to a full £815m. This is why the bank’s overall return on tangible equity (RoTE) fell from an already-miserable 4% to 3.8%.

The second issue weighing on profits was the enormous investment bank where pre-tax profits fell a full 31% and RoTE was only 7.3%. This division continues to underperform as trading profits fall due to regulatory mandates and poor market conditions. This has been the case for several years now, leaving me to wonder why Barclays continue to devote significant assets and management attention to it.

Unfortunately for shareholders, these two divisions weighing down profits hide the continued great results of the underlying retail bank and credit card arm. These UK operations’ RoTE for the quarter was 20.5%, far out-stripping the rest of the bank. Looking ahead, continued high litigation charges, the painfully slow disposal of unprofitable non-core assets and stubbornly high costs are likely to persist for several years to come.

At last some good news?

Shares of emerging markets-focused lender Standard Chartered (LSE: STAN) also rose despite a whopping 59% fall in year-on-year profits. The market looked beyond this headline number to a surprising 58% quarter-on-quarter improvement in the number of non-performing loan (NPL) impairments taken. Analysts had been expecting a much worse result on these bad loans due to the bank’s heavy exposure to faltering emerging markets and struggling commodities producers.

Further good news came in the shape of a 10% year-on-year improvement in total operating costs. This points to the success of current restructuring efforts aimed at narrowing the bank’s focus after becoming far too scattershot during the boom years of the China-driven Commodity Supercycle.

Despite these positive results, Standard Chartered still has some way to go before it will be considered a healthy bank. While the relatively low number of NPLs was heartening, this could be a short-term blip due to the recent rally in commodities prices and Asian stock markets. If sentiment in these two areas turns negative again, the number of NPLs could rise sharply. And with China’s growth slowing substantially there’s reason to believe that it will continue to drag down the economies of the resource-heavy emerging markets where Standard Chartered is largest.

Furthermore, management itself has done its best to subdue expectations for results throughout the rest of the year as restructuring costs mount and market conditions remain volatile. While this was certainly an encouraging quarter, I will still be on the sidelines waiting to see whether the bank’s loans continue to perform better than expected or whether they once again drag Standard Chartered deep into the red.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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