Barclays' Profits Plunge by a Third

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The bank's profits drop 33%, thanks to a 1 billion-pound bill for mis-selling insurance.

This morning, Barclays (NYS: BCS) unveiled a mixed set of results for the first half of 2011, hit by lower profits from investment banking and a one-off provision against mis-sold insurance. Despite these negatives, there were some bright spots for the bank.

Profits fall by a third
In the first six months of this year, Barclays' net income fell 8% to 15.3 billion pounds, compared with the first half of 2010. However, Barclays' operating income was flat at 13.5 billion pounds, thanks to lower impairment charges. In fact, provisions for bad debts and non-performing loans fell by more than two-fifths (41%), to 1.8 billion pounds.

Despite its improving loan book, Barclays' profits were hit by a 1 billion-pound provision for mis-selling the now-infamous payment protection insurance. As a result, pre-tax profits dived 33% to 2.6 billion pounds.

Earnings per share plummeted by 40% to 12.5p and Barclays declared a second interim dividend of 1p, making a total of 2p for the half-year (and the same as 2010).

3,000 jobs to go
Having gone on a recruitment drive in 2009/10, Barclays is likely to shed a few more investment bankers, thanks to trading revenue at Barclays Capital falling by 20%.

Having already cut 1,400 jobs this year, Barclays CEO Bob Diamond intends to cut a further 3,000 positions in order to reduce the bank's cost base. Although the tabloids have leapt on this figure, it's worth pointing out that the bank had 147,500 employees at the end of the first quarter, so it plans to trim only 2% of its global workforce.

A stronger balance sheet
"Diamond Bob" said of these results: "I am pleased with the progress made across Barclays in the first half. We have performed well on our journey to a targeted 13% return on equity by 2013 and have made specific progress against our execution priorities of capital strength, returns on equity, income growth and citizenship. Our capital, liquidity and funding position is rock solid."

In terms of capital strength and liquidity, Barclays' balance sheet has improved, with its Core Tier 1 ratio rising to 11% from 10.8% at the end of 2010. The loan/deposit ratio also fell to 118% from 124%, but is still far higher than the 79% reported yesterday by rock-solid rival HSBC (NYS: HBC) .

Valuation
Although these results were a bit of a curate's egg (good only in parts), investors reacted positively to the bank's performance. Following an early morning spike to 227p, Barclays shares are up 1.3% to 220p, valuing the U.K.'s third-biggest bank at nearly 27 billion pounds.

At this level, Barclays trades on a forecast price-earnings ratio of 7.9 and a projected dividend of 2.9%, covered 4.4 times. Also, its shares trade at a 38% discount to their tangible net asset value of 353p a share.

These figures offer a decent margin of safety for investors willing to bet on a banking bounce-back.

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