Barclays, you couldn’t bank on second half

By Admire Mavolwane

THE investment market is supposedly the realm of rational investors who are adequately informed such that share prices would be incorporating and reflecting all the available information.

Apparently not, otherwise how would one explain the expression that Barclays’ results were “below market expectations”?


It would appear that the market erroneously chose to ignore the conditions under which the bank had achieved the profits that it reported in the first half. It is — one would assume — a generally accepted fact that the first half results were driven by the gains from the high yielding RBZ Financial Bills.


This was a once-off gain, probably an error on the part of the issuer of the bills, which should have been treated as a non— recurring item in the income statement.


The absence of the bills in the second half should have rung alarms bells in the market. Also, it was apparent that the huge salary increases effected in the second half would obviously lead to the deterioration in the cost to income ratio and adversely affect the bottom line.


The two factors were well-known in the market and should have been taken into account notwithstanding the fact that one could be excused for ignoring the impact of the revision of the definition of statutory reserves as well as the change from weekly to daily adjustment, as one would assume that investors outside the banking industry would most probably not have been as well informed as insiders.


Since Monday the price has been adjusted downwards, from $830 on Thursday before the publication of results to $500 this Wednesday, which is presumably the level that is warranted by the reported earnings.


We look at the “disappointing” full year numbers in details.


Net interest income for the banking giant surged ahead by 620% to $763 billion, with $451 billion of it having been earned in the first six months for the reasons alluded to above with net interest margin benefiting, as can be expected, from the high margin paper showing an improvement from 35 to 55%.


Other income growth was less spectacular, fees and commission nearly trebling to $91 billion, whilst net gains from foreign currency trading went up 9,5 times to $38 billion.


Marking to market of securities held for trading saw the group incurring an unrealised loss of $17 billion, which had the effect of cancelling out the $14 billion rental income earned. Total operating income grew six fold to $891 billion.


Cost pressures continued on their upward trend, as operating expenses went up by 757% to $377 billion. The result was a deterioration in the cost to income ratio-exclusive of restructuring costs from 30 to 42%. Inclusion of the retrenchments costs totalling $34 billion, however, sees the ratio come down from 54%. Included in the expenses are exchange losses $119 billion, as a result of failure to secure foreign currency to meet business obligations. Stripping out the exchange losses, results in a much higher increase in costs of 617% to $258 billion, of which the major component is no doubt wages and salaries.


Provisions show the highest growth rate of 3 700% from $3 billion to $114 billion, pushing the provisions to advances ratio from 1 to 18%. Of the total provisions, $98 billion was classified as specific to certain horticultural entities.


Attributable earnings of $254 billion were achieved, up 505% on the 2003 figure. As alluded to earlier, first half earnings of $196 billion, work out to be 3,4 times more than the $58 billion realised in the second, hence the gripe from the market.


Fidelity Life’s full year numbers were a comforting if unspectacular testimony to the fact that life assurance is still profitable in this country.


In general, inflation has a one-two punch on the insurance companies — it primarily erodes their top lines by eroding the disposable incomes available to pay premiums and secondly it reduces the attraction of any type of savings in the depreciating currency; life assurance products are no exception and the share’s 2004 performance (up a measly 21,7% against 173% gain recorded by the industrial index) reflects this.


Net written premium income went up by 554% to $33,4 billion. This increase outstrips the average CSO y-o-y inflation of 381% during the period and was the combined result of net acquisitions of 22 company pension plans and aggressive pricing of premiums on both individual policies and corporate plans.


As monthly company policy contributions are a function of the salary bill, Fidelity benefited from the above-inflation wage increases enjoyed by a sizeable fraction of Zimbabwean workers in 2004.


Investment income with property revaluation increased by only 76% as a result of a much lower property revaluation this time round — $7,4 billion in 2004 vs $15,4 billion in 2003; without the property revaluation, the figure increased by 620% to $34,1 billion from $4,6 billion, with interest income and listed equities revaluations being the major drivers.


On the cost side, total expenses up 611% to $28,9 billion grew at a faster clip than net premium income (up 554%) mainly due to a 664% increase in non-claim expenses; the redeeming feature on the expenses side is that claims paid were up only 487% to $4,7 billion.


All in all, a heartening set of numbers — the group’s core underwriting business is solid and their investment decision-making is sound.


The only fly in the ointment is the relatively small asset management arm which lost $431 million largely as a result of a significant loss of clients (and their money market investments as indicated by the weak income from interest).


If one assumes a going concern, the five-fold increase in dividend to $2 and the net operating cash-flows to $23,9 billion (an increase of 217%) tell the story masked by a flat basic EPS ($8,32 vs $8,33) : that life assurance is still viable for a company that is able to adapt to the country’s economic environment.

Top