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Barclays Profit Growth Held Back by Investment Banking Revenue

Barclays Plc, Britain’s third-largest bank, said first-half profit rose 29 percent as a drop in provisions for bad loans mitigated a decline in investment banking revenue.

Net income rose to 2.43 billion pounds ($3.9 billion) from 1.89 billion pounds in the year-earlier period, the London-based bank said in a statement today. Earnings beat the 2.26 billion- pound median estimate of 10 analysts surveyed by Bloomberg.

Barclays follows HSBC Holdings Plc and Lloyds Banking Group Plc in reporting a gain in first-half profit as provisions for bad loans dropped by almost a third to 3.1 billion pounds. Revenue at Barclays Capital, the investment banking unit led by Robert Diamond, fell 32 percent as income from rates and commodities dwindled. Costs at the unit rose by a third.

“The second quarter was tough,” Diamond, 59, said on a conference call. “Clients were taking less risk in that period of May and June. We have clearly seen in the second half of July more activity in the market. I don’t want to predict how that all plays out for the second half, but it looks more positive.”

Barclays fell 4.7 percent to 324 pence at the close of trading in London. The stock has dropped 3.7 percent in the past 12 months, making it the worst-performer in the FTSE 350 Banks Index, which climbed 11 percent in the period.

Photographer: Chris Ratcliffe/Bloomberg

“Against the backdrop of subdued economic and market activity and the sovereign debt storm of the second quarter, we have delivered good growth in income and profits,” Barclays CEO John Varley, seen here, said. Close

“Against the backdrop of subdued economic and market activity and the sovereign debt... Read More

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Photographer: Chris Ratcliffe/Bloomberg

“Against the backdrop of subdued economic and market activity and the sovereign debt storm of the second quarter, we have delivered good growth in income and profits,” Barclays CEO John Varley, seen here, said.

“The market is going to be upset at the rise in costs,” said Julian Chillingworth, who helps manage $21 billion at Rathbone Brothers Plc in London. “This business will predominantly be driven by Barclays Capital going forward, and the outlook for investment banking is clouded at best.”

Fixed Income

Revenue from trading bonds, currencies and commodities declined by 40 percent to 4.9 billion pounds. Sales at Barclays Capital’s equities and prime services unit, which provides services to hedge funds, fell 18 percent to 1.06 billion pounds due to a slowdown in equity derivatives.

Barclays is increasingly dependent on Barclays Capital for its earnings after selling its fund management unit, Barclays Global Investors, to BlackRock Inc. for $15.2 billion in December to avoid a government bailout.

Pretax profit at Barclays Capital unit more than tripled in the first half, rising to 3.4 billion pounds, helped by an accounting gain on the bank’s bonds. The unit generated about 66 percent of the bank’s pretax profit in the first half, up from half last year. Chief Executive Officer John Varley said in February he wanted the bank to generate a third of profit from Barclays Capital “over time.”

‘Under Pressure’

Costs rose 21 percent to 9.72 billion pounds, as Barclays Capital expanded its equities and merger advisory business in Europe and Asia following the purchase of the North American operations of Lehman Brothers Holdings Inc. in 2008. The firm hired 1,100 people for the unit in the first half, Rich Ricci, co-chief executive of the corporate and investment bank, said in an interview.

Barclays’ “numbers were broadly in line and the Barclays Capital revenue number was strong relative to peers,” Jonathan Pierce, an analyst at Credit Suisse Group AG in London with an outperform rating on the shares, wrote in a note to clients today. “But Barclays Capital full-year revenue forecast might still come under pressure and costs are overshooting estimates. We think there is better value elsewhere.”

Varley and Chairman Marcus Agius indicated the bank has considered the possibility regulators may force it to separate its consumer banking and securities divisions. The government’s banking commission will report next year on whether banks should separate retail from investment banking reduce risks.

‘What If’ Question

“Every prudent organization will ask themselves the ‘what if?’ question,” Varley said today. “All banks are considering what their options are,” Agius said.

Barclays has set aside 1.7 billion pounds to cover employee bonuses, Finance Director Chris Lucas told reporters. Barclays Capital set aside 42 percent of its income in the period, excluding the gain on its own bonds.

Pretax profit at Barclays’s consumer unit in the U.K. jumped 61 percent to 504 million pounds, and profit from wealth management rose 27 percent. The bank’s western European consumer unit posted an 89 percent decline in profit. Barclays’ corporate unit in Spain was hit by a 553 million-pound impairment charge, mostly linked to commercial property, according to Chief Risk Officer Robert Le Blanc.

The bank will pay a dividend of 2 pence a share for the first half.

To contact the reporters on this story: Jon Menon in London at jmenon1@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net

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