Barclays begins "grind" higher

Falling profits, a shrinking investment arm and massive fines dominated Barclays' first half, but the numbers were still better-than-feared and a decent second quarter beat expectations. And with a heap of bad news already priced in, investors have chased the shares higher.

"Legacy issues as well as on-going question marks over potential fines and litigation costs had seen the share price fall almost 20% year to date, but investors are buying back into the stock this morning," says Interactive Investor's head of investment Rebecca O'Keeffe.

Barclays blamed a 7% drop in underlying pre-tax profit to £3.35 billion largely on the investment bank where profit almost halved to little more than £1 billion. An increase in provisions for miss-selling of payment protection insurance (PPI) of £900 million was almost double City estimates, capping reported profit at £2.5 billion. That's up 49%, but still shy of consensus forecasts.

However, a fall in adjusted income of 12% to £13.3 billion was little surprise, impairments fell by a third to £1.1 billion and operating costs were down, too. And an 18% drop in revenue from investment banking - blamed on less volatile currency markets and lower volumes elsewhere - could have been much worse.

On top of that, both Personal & Corporate Banking and Barclaycard ramped up profit by almost a quarter, and, crucially, the new non-core unit (BNC) managed down risk-weighted assets (RWAs) by over £22 billion during the period, building capital strength.

It's why the Capital Requirements Directive (CRD IV) Common Equity Tier 1 (CET1) ratio hit 9.9% in June, making the bank’s target of 11% by 2016 much more likely. Net tangible asset value per share was little changed at 279p.

All of this is clearly encouraging. Numis Securities analyst Mike Trippitt reckons Barclays will make a pre-tax profit of £4.72 billion this year - two-thirds more than in 2013 - giving earnings per share of 15.7p, up from 3.8p. That puts Barclays on a forward price/earnings ratio of 14.

But those estimates are much more conservative than many others in the Square Mile, and it seems the only thing holding back Barclays' share price right now is the threat of potentially massive fines. Barclays is currently under investigation on a number of fronts, including allegations that it helped manipulate financial benchmarks and rigged foreign exchange rates.

For investors willing to take the risk Barclays is, at least, moving in the right direction and likely to grow profits fast. Citigroup reckons the shares will "grind higher, despite ongoing litigation concerns." At 226p, the grind looks to have already begun.

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