Beyond the headlines

By Kevin Murphy.

Barclays’ 2011 results were better than their coverage suggested

Barclays’ full-year results for 2011, which were released on 10 February 2012, attracted some negative headlines – not only, predictably enough, with regard to proposed bonuses but also the disappointing fourth-quarter profits from investment banking arm Barclays Capital. Why then as investors in the company are we satisfied with the numbers posted by the bank?

It is because a recovery in the banking sector is not going to be driven by short-term profits but by two more fundamental issues exercising the market at present – does a particular bank have enough capital and does it have a future? Barclays would appear to satisfy on both counts.

Plus-points worth highlighting from the results are that, despite the negative macroeconomic and banking headlines, the group remains profitable and its loan-loss provisions – that is, the amount of money the bank has to set aside to cover bad debts – is declining. Banks tend to generate significant profits but, since 2008, these have been obscured by large bad-debt provisions. As these provisions reduce, they are revealing the true profitability of the businesses.

Obviously risks remain. Barclays has a number of businesses in continental Europe that are underperforming while Barclays Capital clearly requires further attention. This part of the business remains large and capital-intensive and, while it is in the process of being cleaned up, there is no getting away from one simple fact – it is still an investment bank.

To say that investment banks are currently unloved by the market would be an understatement and some of these businesses are finding life extremely difficult. However, the fourth-quarter numbers out of Barclays Capital should not have come as much of a surprise precisely because we have seen how other investment banks – particularly those on the continent – have been faring.

There was a lot of detail and data in the results but the most important point from our perspective was that the strong profitability of the group has enhanced both its tangible book value and its capital buffer.

Ultimately, when we are invested in any company, it is the risk and reward that determines the attractiveness of that investment. For the banks, the reward is driven by the tangible book value while the risk is driven by the capital buffer. In the case of Barclays, they are both heading in the right direction. These were encouraging results.

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