The Hidden Nasty In Barclays PLC’s Latest Results

barcMany of the FTSE 100’s big names will report their annual results in February, including Barclays (LSE: BARC) (NYSE: BCS.US), which I have previously rated as good value.

I still believe that Barclays offers strong long-term upside, but following a week of below-expectation earnings from the big US investment banks — Citigroup closed down by nearly 5% on Thursday after disappointing investors, while Goldman Sachs reported a fourth consecutive year of lower profits — I’m wondering whether Barclays, which depends heavily on investment banking for the majority of its profits, could also disappoint investors.

Any clues?

Barclays’ third-quarter trading statement certainly set the scene for lower profits. The bank reported pre-tax profits of £2,852m from investment banking during the first nine months of 2013, 12% lower than for the same period in 2012.

Barclays’ investment banking division accounts for more than half of the group’s profits, so a further decline in the fourth quarter could make a noticeable dent on the bank’s earnings.

Barclaycard bad debts

Barclaycard was the bank’s second-biggest profit generator during the first nine months of the year, but although total income rose by 11% compared to the same period in 2012, bad debts rose by 25%, from £763m to £950m.

If this trend continued in the final quarter of the year, credit impairment charges could top £1bn for 2013.

Compensation payouts

Barclays PPI mis-selling payouts rose to £1,350m during the first nine months of last year, up from £1,000m during the same period in 2012.

The bank also made a £650m provision for interest rate hedging redress, up from £450m in 2012.

Although Barclays said that payouts were in line with expectations, further increases aren’t impossible.

European disaster

Barclays’ European retail banking division also remains problematic. Pre-tax losses quadrupled from £229m in 2012 to £815m during the first nine months of this year, almost cancelling out the £983m profit delivered by the bank’s UK retail banking operation.

Although some of this loss was the result of the costs associated with Barclays’ cost-cutting ‘Transform’ programme, Barclays’ European losses remain a problem that is eating into the growth provided by its African operations.

European customer deposits also fell in the third quarter, and were 5% lower than in the second quarter of last year.

Does Barclays remain a buy?

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> Roland does not own shares in any of the companies mentioned in this article.