Barclays' investment banking arm charms market

After Antony Jenkins was shown the door for disagreeing with how to run Barclays' Investment Banking arm, Wednesday's results have come as a relief. The division is doing well and the group continues to shrink its non-core assets while beefing up its financial strength. Investors take note - Investec reckons earnings are set to surge amid tighter cost-cutting.

Revenues slipped 2% to £6.6 billion in the period, but adjusted pre-tax profit rallied 11% to £3.7 billion, supported by its Investment Banking arm and double-digit growth in Africa Banking. After three years at the helm, old Barclays boss Antony Jenkins was fired for refusing to support the bank's investment division enough. Now, it seems the board's thinking may have been justified.

Executive chairman John McFarlane is "personally pleased" with the performance of the Investment Bank, with revenues of £2.2 billion and pre-tax profit jumping a third to £1.4 billion. Total income in the business was up 1% at £4.3 billion, with that from the Markets up 2% at a whisper below £3 billion. Barclays was able to take advantage of market volatility related to fears of Grexit, with double-digit growth in Macro. But these improvements were offset by poor performance in Credit.

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Barclays is spending less as a group, with adjusted operating expenses falling 7% to £8.3 billion, and is continuing to shrink the size of its non-core businesses. Its risk weighted assets have fallen by a quarter since December to £57 billion. Financially, Barclays continues to gather strength and has achieved its 2016 targets, with its bank's common equity tier 1 ratio jumping eight basis points since December to 11.1%, and its leverage ratio reaching 4.1%.

"There is no grand 'strategic reset' though the 2015 dividend will now be held flat at 6.5p (in line with us; consensus 7.7p) to accommodate an expected 'acceleration' of non-core run-off," says Investec analyst Ian Gordon. "We expect some positive relief today."

Indeed, the shares rallied 4% to 289p, near 18-month highs and 31 times forward earnings. This looks expensive for the bank, but EPS should more-than double in the 2016 financial year, which puts the shares on a less demanding price/earnings (P/E) of 14 times. To support this growth, the group will be reducing its cost-income ratio to the mid-50s and achieve a return on equity above its cost of equity.

Still, Investec's Gordon isn't convinced and has maintained his 'sell' recommendation with a 265p target price.

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