What Barclays PLC’s Results Really Meant

Progress in the Barclays plc (LON:BARC) turnaround is going slowly.

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barclays

How much profit did Barclays (LSE: BARC) (NYSE: BCS.US) make last year? And how good (or bad) was it?

They’re not easy questions. Banks produce so many different profit figures, variously called adjusted, underlying, core and statutory, that it’s hard to see the wood for the trees. It’s been dubbed ‘underlyingitis’.

Barclays actually reported adjusted profit before tax of £5,167m and statutory profit before tax of £2,868m. Typically the ‘adjusted’ profits — how the bank would like to be measured — are better than the statutory results dictated by accounting rules.

Flattering

In fact, Barclays has been harsh on itself: it calculated the adjusted profit figure after the £1.2bn cost of implementing its ‘Transform’ restructuring programme, even though that’s a one-off cost.  Perhaps CEO Antony Jenkins is setting up some flattering comparatives for next year.

Statutory profit is an equally misleading measure, as it’s cast after the fair value adjustment (FVA) of the bank’s own debt, an arcane accounting invention that reduces profits when the bank’s own bonds have a higher market value and vice versa.

So I’ve taken to re-jigging banks’ results to show the underlying results before one-off items (based on my own judgement), litigation provisions such as LIBOR and PPI mis-selling, and the warts-and-all statutory figures before the FVA. Here’s Barclays’ three-year track record:

 

£m

2011 

2012

2013

Underlying profit before tax 

5,590  

7,048  

6,376  

Exceptional/one-off items 

(1,419) 

227  

(1,288) 

Litigation 

(1,000) 

(2,450) 

(2,000) 

FVA 

2,708  

(4,579) 

(220) 

Statutory profit before tax 

5,879  

246  

2,868  

Statutory profit before FVA 

3,171  

4,825  

3,088  

 

The table shows how the figure are made up, but what matters is the top line of underlying profit, and the bottom line that includes all the real add-on costs. 2013’s result is pretty poor, well down on last year, but at least it stands fair comparison with 2011. Barclays’ own adjusted profit figure, after the Transform costs, shows a worse result than 2011, something that would shame its peers.

Less income, same costs

The poor results were no surprise. I’d warned shareholders to put their tin hats on. Barclays was especially affected by poor market conditions in the important fixed interest, commodities and currencies (FICC) part of its investment bank, where profits fell nearly 40%. With its business much more skewed to investment banking, Barclays will not generally be in lock-step with the other UK banks.

But there were broader disappointments, especially on costs — and not just politically sensitive bonuses. Operating expenses before one-off costs were barely reduced at all. Mr Jenkins has stuck to his cost reduction target, but time is running out.

Last year’s rights issue has at least strengthened the balance sheet. The bank is on course to meet the newly imposed leverage ratio, and its capital base is respectable, though the core Tier 1 ratio fell back slightly.

Value

At 0.8 times book value (0.9 times tangible book), Barclays’ shares have the value discount of a company yet to turn itself around. This week’s results show that progress is slower than many had hoped for. But if management can pull it off, the upside case remains intact.

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.

 > Tony owns shares in Barclays.

 

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