While 
Barclay’s (BARC) reported a big jump in statutory earnings for the nine months of 2013 compared to the year-ago period, the company’s underlying performance was obscured by a number of large one-off items, including a £1.4 billion provision for the mis-selling of payment protection insurance (PPI); a £650 million provision for interest rate hedging products redress taken in first-half 2013; and a £4 billion non-cash own debt charge taken in 2012.
On an underlying basis, the bank’s pre-tax profit was $4,976 million for the first nine months of the year, down 20% from 2012. Performance in the third quarter was even worse - profit before tax of £1,385 million was down 23% from the run rate in the first half. The two big drivers behind the performance were £741 million of restructuring expenses (£101 million taken in the third quarter) and a third-quarter 44% drop in fixed income trading revenues, which was similar to the size of the fall-off seen across the industry. While the high-level numbers look bad, we see some encouraging signs in the details - profitability remains good in U.K. Retail and Business Banking and at Barclaycard, and the fourth-quarter rights issue brought pro forma capital levels nearly up to mid-2014 targets. However, the poor performance of the investment bank and the acceleration of loan losses in Europe, as well as the bank’s disclosure that it is undergoing a probe into its foreign exchange trading, highlight that losses related to legacy issues are likely to weigh on returns for the no-moat bank for some time. We plan to maintain our fair value estimate.
The biggest issue for Barclays in Q3 was capital. We reiterate our opinion that Barclays’ rights issue will put regulatory capital concerns about the bank to rest, at least for the time being. Barclays’ pro-forma Basel III capital ratio was 9.6%, just shy of the 10.0% that we’d like to see, and its pro-forma leverage ratio was 2.9%, a hair away from the 3.0% level it needs to achieve by mid-2014. Still, we’d be more comfortable with higher capital levels - we estimate that the capital raise brought Barclays tangible common equity ratio, as we calculate it, up to 4.8% from 3.9% at June 30. We’d prefer to see something over 6.0%, as is common in the U.S., and we wouldn’t be surprised to see expectations creep up over time. The flip side of Barclays’ higher capital is lower profitability, and we don’t currently anticipate that Barclays will consistently earn its 15% post-tax return on equity target.
