Barclays Humbled by Results
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We should be glad that most of us are not European bankers. It's a bad line of work to be in the moment. Just ask Robert Diamond, CEO of British financial conglomerate Barclays (NYSE: BCS). He must have been feeling some humility when the bank announced its 2011 results, which included a double-digit fall in net profit and a return on equity figure that was less than half of what the bank had hoped for.
Like most large-scale banking groups, Barclays is a sizable enterprise spread all over the globe. In theory this should hedge its operations somewhat, but Europe's banking groups always seem to be most affected by conditions in their home continent. At the moment those are rocky at best, with Greece and likely several other nations requiring multibillion-euro bailouts to keep their economies afloat.
In a recessionary atmosphere the financial operators that frequently take the hardest hit are investment banks. After all, generally when an economy slides, securities trading volumes go down and few enterprises are in the mood to spend money on speculative activities like share issuance. This trend hit Barclays square in the mouth, as it depends on Barclays Capital, its proportionally large investment banking unit, to produce revenue growth and contribute greatly to its overall bottom line. For 2011, BC saw a painful 34% year on year decline in net trading income, while its fee and commission income also dropped (by 10%). As a result, the unit's pre-tax profit shrank by nearly one-third to GBP 2.97 billion (USD 4.67 billion), from the previous year's 4.39 billion ($6.92 billion at current exchange rates).
Outside of that, Barclays is actually not doing too badly considering Europe's woes. It's not a Deutsche Bank (NYSE: DB) or UBS (NYSE: UBS), both of which have been kneecapped by the continent's overall dismal financial performance. Deutsche fell nearly 60% short of its full-year 2011 target net profit of EUR 10 billion ($13 billion), while UBS netted CHF 393 million ($428 million), a cool CHF 340 million less than what analysts were expecting. Nor is BCS the disaster that is bailed-out fellow UK banking group Royal Bank of Scotland (NYSE: RBS), which expanded a lot more haphazardly and was far less disciplined in its lending practices than BCS, necessitating a huge government bailout. Still, being one of the Continent's top lenders is putting a dent in Barclays's results -- its 2011 operating loss on European retail and business banking deepened 59% year on year to GBP 1.6 billion (USD 2.5 billion).
That 2010 to 2011 difference amounted to around GBP 605 million, not quite the ugly GBP 1.4 billion figure from Barclays Capital. Regardless, it was a contributor to the group's overall year on year net profit fall of 13% to $3.95 billion for 2011, and one of the reasons ROE remains weak (at 6.6%). The latter figure is about half of what Diamond aimed to have the company produce by 2013. As a result, Barclays like many of its fellow big banks throughout the world, will be slashing its bonus pool for the year. The firm's CEO hasn't said publicly whether his extra payout would take it hit, but it's more than likely. After all, if a bank suffers from a slump, its chief executive has to eat more than a few slices of humble pie.
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