Shares in Barclays (BARC) improved 1.72p to 168.1p in a falling market on Friday as the bank posted better than expected third quarter results that were boosted by a strong showing from its under-pressure investment bank.
Pre-tax profit fell 83% to £246m in the three months to 30 September after Barclays absorbed a whopping £1.4bn charge relating to PPI compensation. Also keeping a lid on the share price rise today was management caution on the likelihood of meeting its 2020 return on equity target.
INVESTMENT BANKING BOOST
Bossed by chief executive Jes Staley (pictured below), Barclays reported better than forecast adjusted pre-tax profit of more than £1.54bn, up 16% year-on-year thanks to better than expected investment banking income and more benign than feared impairments, mainly in Barclays UK.
Indeed, Killik & Co views Barclays as ‘an undervalued play on a return to a more normalised UK banking environment with an ability to generate returns in excess of its cost of capital.’
The banking giant’s £246m statutory pre-tax profit was stated after £1.568bn of litigation and conduct charges including a further PPI provision of £1.4bn, compared with guidance of £1.2bn-to-£1.6bn.
On Thursday, rival Royal Bank of Scotland’s (RBS) third quarter update revealed a bigger than expected £900m charge for PPI mis-selling.
MIXED BAG UPDATE
AJ Bell investment director Russ Mould believes Barclays has ‘rather given to shareholders with one hand and taken away with the other’ with today’s update.
‘The numbers themselves are actually somewhat better than expected despite a further PPI provision of £1.4bn (bang in the middle of the guided level). Like its peers the company appears to be a victim of a late surge in claims as some customers left it until close at the August deadline to act. More negatively, the company has raised doubts about its ability to hit a 10% return on equity target in 2020.’
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The market is taking the latter news in its stride for two key reasons, according to Mould. ‘First, most people felt this target would prove a stretch anyway so weren’t hanging their hats on the bank hitting the 10% level.
'Second, its excuses for falling short look pretty cast iron and would not be a big surprise to investors. Interest rates are no longer expected to go up, and this puts pressure on the amount banks can charge to lend money. While global and domestic economic and political uncertainty remains elevated.’
KEEPING BRAMSON AT BAY
Barclays’ management are also having their feet held to the fire due to the presence of activist investor Edward Bramson on the shareholder register. Bramson is agitating for a change of strategy - principally scaling back its investment bank.
‘This part of the business was actually the star performer in the third quarter which Staley will likely see as ballast to keep on resisting Bramson’s pressure,’ added Mould.
