Barclays PLC (BCS, Financial) recently reported its Q4 results for FY2104, with a 27% year-over-year growth to $5 billion (£2.8 billion) in adjusted net income. The company attributed the growth to an increase in its lending income, coupled with considerable curtailment in Barclays’ non-core assets. Although Barclays witnessed a 5% year-over-year fall in net operating income to $39 billion (£23.6 billion)--due to decline in market revenues, the company delivered an impressive overall performance across segments, excluding both Africa Banking and Investment Bank. Furthermore, the company’s cost-saving initiatives ensured a drop in operating expenses. Following the results, Barclays’ shares climbed to $15.85 during the day’s trading to settle at $15.66.
Investment Bank, Africa Banking Drag Overall Earnings
While Barclays’ statutory profit before tax dropped 21% year-over-year to $4 billion (£2.3 billion) during the fourth quarter, the company witnessed 12% growth in adjusted profit before tax to $9 billion compared to last year's quarter. Operating expenses, excluding litigation and conduct charges and expenses, related to the Transform program, dropped 10% year-over-year to $26.0 billion. Concurrently, the company’s cost to income ratio fell from 71% in fiscal 2013 to 70% in 2014.
Segment-wise, Barclay saw a 29% rise to $5 billion in profit before tax in its Personal and Corporate Banking division, with the rise attributed to growth in net operating income, decline in credit-impairment charges and reduced operating expenses. At the Barclaycard division, the company reported a 13% growth in profit before tax to $2 billion on the back of improved efficiency and enduring growth in net lending. The company also managed to cut losses in its Barclays Non-Core division from the $3 billion loss before tax in last year's period to $2 billion in Q4 2014. Barclay’s division for Head Office and Other Operations also logged a profit before tax of $160 million for the quarter compared to a $23 million loss in the previous year's period.
However, both the Africa Banking and Investment Bank divisions logged losses for the last quarter. While profit before tax for the Africa Banking division stood at $1.6 billion, down 6% compared to the year-ago quarter, owing to reduced net operating income, Barclays’ Investment Bank logged profit before tax of $2 billion, down a massive 32% from the year-previous year's figure. The company attributed the downward trend in its Investment Bank to an 18% drop in market revenues during the quarter.
Amongst other foreign banks, while Deutsche Bank AG (DB, Financial) and UBS Group AG (UBS, Financial) posted better Q4 results in 2014 compared to their prior-year performance, HSBC Holdings Plc (HSBC) reported 18% loss in earnings.
The Way Ahead
Barclays declared a final dividend of $0.05 (3.5p) a share for 2014 resulting in a total $0.10 (6.5p) a share payout for the year. Total dividends paid out to ordinary shareholders during the fiscal grew 23% to $1640.9 million. The company, which saw its Common Equity Tier (CET) 1 ratio rise from 9.1% as of Dec 31, 2013 to 10.3% as of Dec 31, 2014, expects to touch an over 11% CET ratio by the year 2016.
The company, which had initiated a strategic program for cost management – Transform- in 2013, aiming to lower net operating expense to around $26.04 billion by the year 2015, plans to continue implementing the program through to 2016 via innovation, industrialization and rightsizing measures. Barclays expects its Transform-related expenses to be around $1087 million in 2015 and $310 million in 2016.
However, Barclays’ constantly increasing legal provisions and the possibility of litigation arising from regulatory investigations remains a plausible concern for investors. In 2014, Barclays created a $20.61 billion provision associated with the on-going investigation of the company allegedly manipulating foreign exchange rates. The company further set apart an additional $18.3 billion provision towards covering the payout over payment protection insurance redress.
Final Thoughts
Barclay delivered a strong performance in Q4 2014 on the back of the company’s enduring cost management strategy as well as profits across most segments. The company’s robust financial position combined with a diversified business model is expected to support its overall growth in the upcoming years. Furthermore, the company’s enduring restructuring plans and steady dividend payouts make it an attractive option for investors.
However, the possibility of litigation and slow growth in revenues combined with sluggish global economic recovery and a rigid regulatory landscape is expected to weigh on Barclays’ performance in the short term. While experts project an average annual earnings growth rate of 13.86% over the next five years, Barclays is expected to see its earnings increase by 60.38% in 2015, compared to the last fiscal with a consensus EPS of $1.7 per share for the year. The Barclays stock currently carries ‘buy’ guidance.
