Barclays (LSE: BARC) (NYSE: BCS.US) announced its 2014 interim results on Wednesday: do they make any difference to the investment case?
The bank said that adjusted profit before tax for the first half of the year was down 7% to £3,349m. The drop was “largely driven by currency movements and a reduction in the investment banking profitability”, which was only partially offset by improvements in personal and corporate banking, and Barclaycard. Profits were down 8% for the second quarter, compared to a year earlier.
Capital ratios were marginally better than expected, although revenue for the core retail operations weren’t particularly impressive, in spite of improved profitability. Barclaycard was the star performer. As expected, revenues in investment banking are falling fast, so Barclays needs growth in its retail unit, where competition is fierce. Retail revenue may come under more pressure in the next few quarters.
The bank is de-risking is balance sheet, which is encouraging. Still, Barclays had to set aside £900 million to compensate customers for mis-sold insurance products. Its shares were up 3.5% in early trade, but I think they are fully priced right now.
Barclays: Better Than European Rivals
So Barclays reported headline numbers that were better than consensus estimates — but I don’t think they were particularly good. They were certainly better than those of European rivals, however.
UBS’s net profit stood at 792m Swiss Francs in the second quarter, which compares with 690m Swiss Francs a year earlier. Investment banking revenues came in better than expected. The Swiss bank’s cost-cutting plan is broadly on track, while capital ratios are in good order.
The chief executive officer of UBS, Sergio Ermotti, praised the bank’s performance in Q2, saying that UBS reported “a solid set of results across all businesses, in all regions”. So, why was UBS stock down more than 1% on Tuesday?
Quarterly results from Deutsche Bank weren’t too bad, either. In fact, pre-tax profit came in well above consensus estimates. Profits for the investment-banking unit were surprisingly good, too. Deutsche Bank is also delivering on its cost-cutting plan, although its capital strength remains under the spotlight in spite of a recent rights issue.
Still, the question is: why was Deutsche Bank stock virtually flat on Tuesday?
The Broker & The Press
As far as Deutsche Bank is concerned, “Litigation provisions in the quarter was EUR470m and notably the contingent liability for potential future provisions rose from EUR2bn to EUR3.2bn in Q2,” Royal Bank of Canada told its clients on Tuesday.
“UBS and Deutsche Bank have been drawn into an expanding investigation of the anonymous “dark pool” trading venues of banks as it emerged that both have received inquiries from authorities over their operations,” the Financial Times reported on Tuesday after the banks reported their quarterly results.
These elements are more important than profits in the current environment.
229p A Share
At this level, the shares have recouped only 5% of the value they had lost when Dark Pool allegations emerged.
The bulls argue that Barclays stock is a bargain at this price, but several risks weigh on the valuation of the British bank. As I recently noted, these are: a) litigation risk; b) reputation risk; c) execution risk associated to its cost-cutting plan; d) divestment risk associated to disposals in Europe; e) dilution risk; f) and dividend risk.
Analysts’ estimates suggest that pre-tax profits at the British bank will be on their way up in the next couple of years, but a surge in profits doesn’t equate to value creation, as shown by the performance of UBS shares and Deutsche Bank shares today. Likewise, medium-term prospects are grim.
Moreover, in Europe, Credit Suisse may offer more upside than Barclays, although the two carry a similar risk profile.
