Barclays: Better Than Expected

Barclays PLC (BCS) reported better-than-expected results today, with 2008 full-year pretax earnings down 14% year over year to £6.1 billion from 2007’s £7.1. This compares to the consensus estimate of £5.6 billion and our estimate of £5.4 billion, as revenues came in higher than anticipated. This partly reflects the acquisition of Lehman Brother North American operations last fall, which contributed roughly £2.3 billion in one-time gains.

The UK retail and commercial banking businesses held up surprisingly well, posting a 6% increase in pretax profits. Barclays Capital witnessed a 44% slump in pretax profits, despite the Lehman gain, largely due to the impact of gross market dislocation losses of £8.1 billion, partially offset by hedges of £1.4 billion and gains of £1.6 billion from the general widening of credit spreads on issued notes by Barclays Capital.

Looking forward to 2009, the company notes that credit market losses should be lower than those in 2008, but loss provisions on loans and advances will rise given the deteriorating economic outlook in its key markets in the UK, Spain, South Africa and the US. Moreover, the reductions in interest rates in the UK, US and elsewhere are playing havoc with lending spreads. Our 2009 estimates are under review.

Importantly, Barclays intends to reinstitute dividend payments in the second half of the year, which were stopped in 2008’s second half to conserve capital. As to capital, the company’s pro forma Equity tier 1 ratio was 6.7% and the Tier 1 ratio was 9.7%, both benefitting from £7.8 billion of new capital raised from private entities (BCS did not participate in the British government’s recapitalization last year).

BCS shares are up over 11% in morning trading from Friday’s close of $6.29, though down 35.8% year to date. We are continuing our Hold recommendation on the shares of BCS, and note that the current Zacks rank is 3, indicating no clear directional pressure on the shares.

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