OREANDA-NEWS. Fitch Ratings says that Barclays plc's (A/Stable/a) 2Q15 results benefited from continued sound performance in the bank's retail and corporate banking and credit card businesses. Profitability at the investment bank improved after a poor performance in 2014.

We expect earnings in the second half of the year to reflect seasonally weaker quarters, but as operating expenses decline, the bank should be able to reap the benefits of its strong franchises in retail banking and credit cards.

Barclays' group structure is evolving as the group is required to establish a ring-fenced banking subsidiary in the UK and an intermediate holding company in the US. The group intends to establish a new legal entity to house the ring-fenced bank, which will include the group's domestic retail and other businesses. Barclays Bank plc and its international subsidiaries will remain outside the ring-fence, but the bank has not reached a final decision on where some of its businesses will be housed. At the same time, the group is building up layers of subordinated debt and hybrid capital, which together with senior debt issued by the holding company and down-streamed to the operating company, should provide additional protection to Barclays Bank's senior creditors if it ranks junior to Barclays Bank's external senior creditors.

Barclays generated an 8.4% post-tax return on average shareholders' equity in the quarter. This was well ahead of previous quarters but still below the bank's target as its non-core assets continued to weigh on performance. The group reported GBP1,849m 2Q15 pre-tax profit adjusted for own credit gains (GBP282m), a GBP496m gain related to Lehman acquisition assets and GBP850m provisions for UK customer redress. Adjusted pre-tax profit increased 12% yoy and, following sound performance in 1Q15, the bank's 1H15 adjusted pre-tax profit was up 11% yoy.

Barclays' performance continued to be affected by sizeable conduct charges, which in 2Q15 related to customer redress for payment protection insurance sales (PPI, GBP600m) and other customer product sales. The payment of a GBP1.6bn fine in settlement of regulatory investigations into foreign exchange activity and USD ISDAFIX setting did not affect 2Q15 earnings. We expect further sizeable conduct costs to dent profitability as legacy cases are worked out.

Continued cost control will be important for the bank to reach its performance target, and Barclays confirmed its GBP14.5bn core cost target for 2016. Operating expenses, excluding litigation and conduct costs, fell 12% in 1H15 to GBP7,833m, and within operating expenses, staff costs fell 15% yoy in 1H15.

Barclays' common equity tier 1 (CET1) ratio improved to 11.1% at end-2Q15 from 10.3% at end-2014, in line with its global trading and universal banks, mainly driven by a drop in risk-weighted assets in the investment bank and in the Barclays non-core (BNC) division. The group expects the CET1 ratio to remain broadly stable in 2H15. From 2016, we expect the bank to continue strengthening its CET1 ratio and to comfortably reach its target CET1 ratio, which is currently defined as about 150bp above the regulatory minimum requirement, indicating a CET1 ratio target above 12%. Barclays' regulatory leverage ratio also improved, to 4.1% in 2Q15 from 3.7% at end-2014, which compares well with European peers, as the group reduced its reverse repo and derivative books.

Barclays' personal and corporate banking (PCB) division posted firm operating results, but pre-tax profit was dented by a GBP150m charge relating to the sale of its US wealth management business and customer redress in the US. This led to a 9% decrease in 2Q15 pre-tax profit to GBP709m. Excluding this charge, pre-tax profit improved 10% as revenue benefited from growth in corporate lending, improved deposit margins and reduced operating costs. We expect the performance of PCB to remain firm throughout 2015 given a benign operating environment.

Growth continued in Barclaycard, which saw 11% yoy growth in customer loans and reported pre-tax profits of GBP429m in 2Q15, up 8% yoy. We expect the credit card business to maintain its sound performance, despite a reduction in interchange fees in Europe following the introduction of a cap, as Barclaycard's business is geared towards the lending business and is geographically diversified. Loan impairment charges, which remained low at 283bp of gross loans in 2Q15, are likely to increase as the book matures, but we expect any increase to remain easily manageable for the bank.

Its Africa banking division's 2Q15 pre-tax profit was flat yoy, but 1H15 results, which benefited from a strong 1Q15, increased 12% over 1H14. Africa remains a growth market for the group, where it aims to strengthen its franchise. However, with GBP245m 2Q15 pre-tax profit, the division remains a small profit contributor.

Barclays' investment banking (IB) generated GBP765m 2Q15 pre-tax profit, up 35% yoy, driven by strong trading results and lower operating costs. Unlike many peers, Barclays saw revenue in credit trading remain stable yoy and reported a 10% increase in macro (foreign exchange and rates) trading. Equities trading, on the other hand, saw a 2% decline, and revenue from lending and underwriting and advisory fell 3%. IB pre-tax profit also benefited from reduced operating expenses, which fell 14% yoy, mainly because of lower costs to achieve its strategic plan and lower litigation and conduct costs.

BNC reported a GBP256m 2Q15 pre-tax loss as revenue lost from sold businesses exceeded the cost savings in the unit. We expect future performance of this division to be driven by operating expenses, which amounted to GBP521m in 1H15, of which about 40% were related to the remaining retail businesses in the unit, mainly in Italy and Portugal. BNC continued to reduce RWA and leverage exposure in 2Q15, and RWA at end-June amounted to GBP56.6bn. Given the progress in running down BNC, Barclays announced that it aims to reduce RWA in the unit to GBP20bn in 2017, and subsequently reintegrate it into the main business.

Barclays' liquidity and funding remains sound: at end-2Q15 its regulatory liquidity coverage ratio stood at 121% and its loans-to-deposits ratio at around 98% across the group and 88% in the retail businesses (Barclaycard, PCB, Africa banking). At end-2Q15, the group's liquidity pool amounted to GBP145bn, of which 80% cash, deposits with central banks and high quality government bonds covered more than twice its wholesale debt maturing in less than a year.