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Barclays PLC Rises As Q3 Results Beat Expectations

BarclaysBarclays‘ (LSE: BARC) shares are rising this morning after the bank posted a better-than-expected set of Q3 results. Indeed, for the third quarter Barclays reported adjusted pre-tax profits of £1.59bn, compared to the average analyst estimate of £1.1bn. Group adjusted profit before tax increased 5%.

Unfortunately, Barclays’ upbeat results announcement was overshadowed by a more serious matter. The bank is one of a handful of market-leading forex dealers at the centre of a global investigation into the $5.3tn-a-day currency market. As a result of this investigation, alongside today’s results, Barclays revealed that it was setting aside £500m as a provision for any fines stemming from this investigation.

In addition, the bank announced an extra provision of £170m to settle claims of mis-selling payment protection insurance. 

Results breakdown

On the face of it, Barclays’ results look okay and beat expectations, which is always news. However, after digging through the numbers I’ve spotted some interesting figures that reveal the how the bank has managed to achieve this performance.

For example, even though Barclays’ profit came in ahead of expectations, the company’s investment banking arm, which usually provides around 50% of group profit before tax, reported a slump in pre-tax profit from £465m to £284m. 

But while Barclays’ investment bank struggled during the period, other divisions performed strongly. In particular, Barclays’ personal and corporate banking arm reported pre-tax profit growth of 18%. Barclaycard reported pre-tax profit growth of 21%.

The strong performance of Barclaycard and Barclays’ personal and corporate banking arm, along with a lower level of impairments, helped Barclays increase overall adjusted profit before tax by 5%.

Multiple headwinds 

Still, even though Barclays has impressed with today’s results, the bank is still facing multiple headwinds. 

Indeed, while the bank sailed through the ECB stress tests, the results of which were released earlier this week, Barclays still has to pass the Bank of England’s stress test. The BoE’s tests will be tougher than those of the ECB, and some analysts believe that Barclays will fail the BOE’s tests due to the group’s high leverage ratio. 

What’s more, Barclays is facing a wave of litigation and could be required to set more cash aside to meet fines over the next few quarters. Some of the more pessimistic analysts believe that in the worst case scenario, Barclays is facing £7bn worth of fines and legal costs over the next few years.   

Still, today’s quarterly results from Barclays do show that the bank is making progress. Most importantly the bank’s financial cushion is improving.

Barclays’ reported tier one capital ratio now stands at 10.2%, up from 9.9% as reported at the end of June. Barclays’ capital position should increase to around 10.4% after the sale of its Spanish business. Further, during the third quarter Barclays’ key leverage ratio increased to 3.5%.

It’s up to you

All in all, Barclays’ third-quarter results were impressive and have shown that the bank is making progress. Nevertheless, headwinds remain and Barclays’ is still facing the possibility of hefty fines and litigation, as well as leverage ratio issues. 

However, before you make any trading decision I strongly advise that you take a closer look at Barclays.

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