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Should You Buy, Sell or Hold Barclays PLC Following Q3 Results?

Barclays’ (LSE: BARC) shares have fallen by as much as 5% in early trading today after the company reported a mixed set of third quarter results. 

The bank reported a 10% fall in adjusted pre-tax profit to £1.4bn, down from £1.6bn as reported a year ago. Barclays reported an adjusted pre-tax profit of £1.9bn for the second quarter of 2015. 

Statutory profit before tax fell by around a third year-on-year to £861m, compared to £1.2bn reported for the same period last year. 

It wasn’t all bad news, however. Over the nine months to the end of September, adjusted profit before tax increased 4% year-on-year to £5.2bn. Furthermore, adjusted group operating expenses fell 5% to £12.5bn as a result of the group’s “strategic cost programmes”.

Hidden bad news

Unfortunately, away from the headline figures there were plenty of hidden nasties within Barclays’ results release. For example, Barclays announced that it was setting aside £270m relating to the settlement of litigation regarding US mortgages. A further £290m is being set aside to compensate UK customers following an internal review of rates given on foreign exchange transactions. 

What’s more, the bank laid out, for the first time, the expected costs to implement the ring-fencing of its UK retail bank. Management expects the ring-fencing costs to total around £1bn, £100m of which will be spent this year. An additional £400m will be spent putting the ring-fence in place during 2016, and up to £500m will be spent separating retail and investment bank operations after 2016.

As a result of these added costs, Barclays’ has been forced to raise its guidance for core costs and lower the group’s return on equity target by 1%, from 12% to 11%. 

Haunted by legacy issues

Barclays is going through a period of transition, and today’s results highlight how much work there is still to be done. The bank is being haunted by legacy issues and rising regulatory costs. These costs are offsetting almost all of the good news from the bank’s core business. 

Indeed, Barclays’ core business reported a 7% rise in pre-tax profit for the third quarter. Return on equity for the core business averaged 10.5% during the three months to the end of September. Broken down, Barclaycard, which is growing fast in the US, saw profits leap 41% year-on-year to £508m while personal and corporate banking improved by 9% to £855m. Barclays’ African banking division pre-tax profit fell by 8% to £251m.

However, after factoring in £1.3bn in charges for UK customer redress, £1.1bn for ongoing investigations and litigation, and a final £320m loss on the sale of non-core assets, all of which were booked during the third quarter, Barclays’ core figures lose their shine. 

The bottom line 

Overall, Barclays’ third-quarter results were a mixed bag. On one hand, the bank’s core business is charging ahead but on the other, rising costs are holding back group growth. 

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Rupert Hargreaves 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.