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Fitch: Barclays Reports Resilient but Modest Earnings
February 27, 2017 / 1:52 PM / 9 months ago

Fitch: Barclays Reports Resilient but Modest Earnings

(The following statement was released by the rating agency) LONDON, February 27 (Fitch) Fitch Ratings says Barclays' resilient domestic earnings were diluted by the group's corporate and investment banking business in 2016, although stronger capital markets activity and a stronger dollar compared with sterling had a positive effect on fourth quarter and overall results. The group's returns on tangible equity of just 1.1% in the quarter and 3.6% for the full year were weaker than US and some European peers. Reducing the non-core (Barclays Non-Core, or BNC) caused a sizeable GBP0.8bn loss in the quarter and GBP2.8bn in the full year. Positively, the bank has continued to make good progress in reducing BNC's risk-weighted assets (RWAs) in a capital-accretive way. The bank did not add material provisions against outstanding conduct cases in 4Q16, which helped profitability for the quarter, in our view. Net interest income, more heavily concentrated in the UK, was broadly stable in the core bank and declined by 7% yoy for the group in 4Q16, including negative interest in BNC. Barclays UK maintained a net interest margin of 356bp, broadly stable compared with 4Q15, as balance growth and liability-repricing initiatives helped offset margin pressure from the base rate during the year. Management has indicated that net interest margin (NIM) should remain between 350bps and 360bps in 2017 if base rates are unchanged. A sharp increase in trading revenue and, to a lesser extent, fees and commission income in Barclays International (BI) reflect an uptick in trading activity, particularly in the US, continued business growth in cards, and a weakening of sterling. Barclays earned around one third of revenues in the US in 2016, according to management. Operating expenses are impacted by costs relating to the implementation of structural reform, which we expect will continue in 2017. In 4Q16 they were also impacted by a one-off change in accounting of deferred bonuses, which front-loads a larger portion of awarded compensation through the income statement (GBP395m charge). Within BI, Corporate and Investment Banking's net revenues increased 21% yoy compared with a weak 4Q15. Sales and trading income increased 31% yoy, benefiting from credit trading, which continued to perform well, up 34% yoy especially due to secondary trading in emerging markets. In banking, advisory fees increased, in particular in M&A. Corporate lending and transaction banking were impacted by margin compression and revenues, mainly in sterling, declined slightly. Consumer Cards and Payments' pre-tax profit improved 4% yoy. Impairments increased in line with portfolio growth, but also as a consequence of higher delinquency rates, driven by a temporary change in the business mix in US cards. We expect the acquisition of a high-quality portfolio to have a positive effect on arrears and impairment metrics in 2017. BNC was impacted by losses related to running down the derivatives portfolio and by reduced income-generating businesses. Management expects further losses of approximately GBP1bn in 2017, mainly in 1H as the group progresses with reducing the unit's RWAs towards the revised guidance of GBP25bn by June 2017, after which BNC will no longer constitute a separate segment. Components to be re-integrated into the core businesses will likely include the high-quality ESHLA portfolio, Italian mortgages and remaining long-dated derivatives. Barclays has raised its CET1 ratio target to 150bps-200bps over minimum regulatory requirements (currently suggesting a range of 12.3%-12.8%, which the group met at end-2016 by reporting a CET1 ratio of 12.4% (+80bp during 4Q16). It is likely that the CET1 ratio will face headwinds, including possibly large conduct costs, regulatory and accounting changes due to be implemented over the next few years. However, progress towards the target should be supported by the benefits of the sell-down of BAGL, which is set to add over 75bp, deleveraging of BNC and by restoring internal capital generation. The CRDIV leverage ratio increased to 4.6%, and should improve further as Barclays progresses with meeting its AT1 requirement of 2.3% of RWAs, including 0.8% as part of its pillar 2A requirement. Barclays rejected a settlement with the US Department of Justice (DoJ) in December 2016 over allegations of wrong-doing in its pre-crisis US RMBS dealings. The DoJ has filed a civil complaint against the bank and two former employees, which Barclays seeks to dismiss. The bank's existing provisions of GBP455m against legal, competition and regulatory matters are low, which suggests that little, if any, has been set aside for this case. Barclays has already issued around 47% of its GBP10bn MREL funding plan for 2017. The group plans to meet MREL requirements (currently 28% by 2022 based on an initial Bank of England assessment subject to review by end-2020) largely through refinancing maturing operating company debt through the holding company. At end-2016 it estimates that it would need incremental holdco issuance equivalent to around 11% of end-2016 RWAs (or just above 12% including capital instruments with a call date pre-2022) to meet 2022 requirements. Barclays' liquidity profile remains solid, as the liquidity pool increased to GBP165bn, more than double the group's wholesale debt maturing in one year, and the liquidity coverage ratio was 131%. 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