Barclays hit by cost concerns

TIP UPDATE: Barclays' costs need tackling and the bank remains over-reliant on volatile investment banking

August 2, 2011

Barclays' profit slide was lower than analysts had expected and, in any case, isn't as grim as it seems. Adjust for a hefty £1bn provision against payment protection insurance mis-selling - along with various other items such as disposal gains - and adjusted half-year pre-tax profit rose 24 per cent year on year to £3.68bn.

IC TIP: Sell at 222p

But there's plenty that investors need to keep an eye on. Despite culling 1,400 from the group's headcount in the first half, costs are creeping up. Indeed, the bank's cost to income ratio rose two percentage points in the year to 64 per cent, high compared to sector peers. In response, chief executive Bob Diamond has promised to axe £250m from costs this year, with £2bn of savings in total having been identified for delivery by 2013.

Then there's the group's heavy reliance on its investment banking operation, which now generates over 60 per cent of group adjusted profits. The problem is that investment banking is volatile and the core Barclays Capital operation saw profit slide 9 per cent in the period to £2.3bn. That reflected soft conditions in the unit's fixed-income, commodities and currencies businesses.

Still, the group's retail operation did see adjusted pre-tax profit rise 33 per cent to £1.45bn - although the European retail side suffered a £161m loss after absorbing a £129m restructuring charge. And credit quality is on the mend, with the group's impairment charged dropping 41 per cent year-on-year to £1.83bn. The capital position looks good, too, and the bank reported a core tier one capital ratio of 11 per cent, although that's under the current capital rules - some months back analysts at broker Evolution Securities calculated that, under the new Basel III capital regime, Barclays could be facing a capital deficit of roughly £2bn by 2013.