Barclays PLC (LON:BARC) posted a sharp fall in first-half pre-tax profits as litigation and settlement costs ballooned.
Pre-tax profits dropped to £1.7bn in the six months ended June 30 from £2.3bn a year ago after the bank paid £1.4bn in March to settle a lawsuit with the US Department of Justice over the sale of mortgage-backed securities in the lead up to the financial crisis.
The charges also included a £400mln provision for the payment protection insurance scandal, although this was lower than last year’s £700mln charge.
Excluding litigation and conduct charges, pre-tax profits rose to £3.7bn from £3.1bn last year as credit impairment charges fell 26% and operating expenses declined 5%.
Operating expenses were lower due to cost cuts in the international arm and the non-recurrence of charges related to the non-core division that was closed last July with the residual assets integrated into the group.
No significant litigation or conduct charges in second quarter
Chief executive Jes Staley noted the second quarter was the first time it had not paid any significant litigation or conduct charges, restructuring costs, or other exceptional expenses. Second quarter pre-tax profit almost trebled to £1.9bn from £659mln last year.
READ: Barclays posts loss after taking hit from PPI claims and settlement over US fraud case
“In effect then, it is the first clear sight of the statutory performance of the business which we have re-engineered over the past two and a half years - Barclays' transatlantic consumer and wholesale bank - and it is a positive sight,” Staley said.
However, the bank is not out of the woods yet in light of news that the UK Serious Fraud Office has applied to the high court to revive its case over the bank's 2008 fundraising with Qatar. There is also another year to go before the Financial Conduct Authority's deadline for PPI complaints.
Total income flat, investment bank improves
Total income was broadly flat at £10.9bn in the first half, with the benefit of no more negative income associated with the former non-core division offsetting a 1% decrease in the UK arm and a 3% fall in the international business.
Income in the under-pressure investment bank rose 1% to £5.4bn, largely due to a strong performance in the equities division.
Barclays had been facing pressure over the investment bank from activist investor Edward Bramson, who wants to shut down almost all trading activity in the division to cut costs and improve returns.
"The positive performance of the investment bank will help to fend off the advances of activist investor Edward Bramson, who has taken a 5% stake in Barclays and reportedly wants to slim down the division," said Laith Khalaf, senior analyst at Hargreaves Lansdown.
"However it’s been achieved against a backdrop of good times across the US investment banking sector, and anyone can make hay when the sun is shining."
UK margins under pressure
The net interest margin – a key measure of profitability – fell to 3.24% from 3.69% in the UK business, reflecting the integration of the education, social housing and local authorities portfolio from the non-core unit and pricing pressures stemming from tough competition in mortgage lending.
In the international unit, NIM rose to 4.3% from 4.06%.
The group’s common equity tier 1 (CET1) capital ratio, which measures banks’ financial strength, stood at 13% at the end of the period, compared to 13.3% at the end of December.
The return on tangible equity was 11.6% with returns in both the UK and international businesses.
Barclays raised its interim dividend to 2.5p from 1.0p last year and reaffirmed its commitment to pay a dividend of 6.5p for 2018.
"The increase to the dividend gives a projected yield of 3.4% and, whilst this is not of itself notable, it could imply further returns to shareholders and even a share buyback programme in the not too distant future," said Richard Hunter, head of markets at Interactive Investor.
Shares edged down 0.4% to 190p in morning trading.