Barclays May Post Rise in Pretax Profit on Fixed-Income Division

Barclays CEO Antony Jenkins
Antony Jenkins, chief executive officer of Barclays Plc. Photograph: Justin Thomas/Visual Media via Bloomberg

Barclays Plc may say third-quarter pretax profit rose as revenue from the fixed-income arm of its securities unit jumped, mirroring gains at its U.S. competitors.

Pretax profit, excluding provisions and accounting losses from revaluing the bank’s own debt, probably rose 25 percent to 1.67 billion pounds ($2.7 billion), according to the median estimate of eight analysts surveyed by Bloomberg. The London-based lender is scheduled to report earnings at 7 a.m. tomorrow.

The results will be the first for Antony Jenkins, who took over as chief executive officer in August after Barclays was fined a record 290 million pounds for manipulating Libor. He’s benefited from a rebound in fixed-income markets triggered by European Central Bank President Mario Draghi’s July pledge to defend the euro with “whatever it takes.” The spread between Spanish and German 10-year bond yields has since narrowed by more than a percentage point.

“Fixed income, currency and commodities was the strong component of the third quarter so far for other banks, so all eyes will be on the strength of that line for Barclays,” said Vivek Raja, an analyst at Oriel Securities Ltd. in London. He rates Barclays a hold.

A Barclays spokesman declined to comment. The shares have risen 42 percent in London trading in the second half, for the second-best performance in the Bloomberg European Banks Index, which has gained 15 percent.

FICC Revenue

Goldman Sachs Group Inc.’s so-called FICC revenue climbed 28 percent from a year earlier and was up 1 percent from the second quarter, according to figures released two weeks ago. JPMorgan Chase & Co.’s fixed-income trading revenue excluding accounting adjustments rose 33 percent in the third quarter, while Citigroup Inc.’s increased 63 percent.

Barclays’s FICC revenue may rise 20 percent to 1.99 billion pounds from 1.66 billion pounds for the third quarter, Credit Suisse Group AG analysts led by Amit Goel said in a note to clients on Oct. 23. That could push investment-banking revenue 23 percent higher to 2.9 billion pounds, Goel wrote. In the first six months of 2012, FICC accounted for more than half of revenue at Barclays’s corporate and investment banking unit, which in turn generates about half the lender’s total revenue.

Those gains will be eroded by provisions for compensation to clients who were wrongly sold insurance on loan repayments as well as an accounting adjustment on the fair value of Barclays’s debt. So-called credit valuation adjustments require banks to book losses when the value of their debt rises, and gains when it declines, on the theory that a loss, or profit, would be realized were the bank to repurchase that debt.

Net Loss

Barclays will probably post a net loss of 229 million pounds for the quarter, according to Christopher Wheeler, a banking analyst at Mediobanca SpA in London, compared with net income of 1.15 billion pounds a year earlier.

Barclays said on Oct. 18 that it will set aside an extra 700 million pounds to compensate clients wrongly sold payment-protection insurance, weeks after Jenkins, the bank’s former consumer-banking head, became CEO. That provision is on top of the 300 million-pound charge in the first quarter. The charge brings the total Barclays has set aside to compensate customers who were sold the insurance on loans unnecessarily or without their knowledge to 2 billion pounds.

Pretax third-quarter profit, excluding the PPI provision and a charge of 1.1 billion pounds of swings in the value of its own debt, would still be in line with analysts’ estimates of about 1.7 billion pounds, Barclays said on Oct. 18.

Rich Ricci

Rich Ricci, who became the sole leader of the securities unit in June, this month combined part of the fixed-income and equities operations in his first reorganization since taking sole control of investment banking in June. Ricci helped build the investment bank as the lieutenant of former CEO Robert Diamond, who left in July in the wake of the Libor fine.

The lender is cutting just under 10 percent of staff in its equities division in Europe, Middle East and Africa to reduce costs amid a slump in trading volumes, people with knowledge of the matter said on Oct. 19. Securities firms from Milan-based UniCredit SpA to Tokyo-based Nomura Holdings Inc. are also shrinking equity businesses in Europe as trading volumes fall and profitability decreases.

Oriel’s Raja said Barclays is likely to see less of a bounce from fixed income than some of its U.S. peers, such as Citigroup and JPMorgan, given its asset holdings are less risky.

“The market is probably aware enough by now that Barclays’s investment bank’s low inventory risk probably means they’ll underperform slightly this quarter, but that’s no bad thing as the income is less volatile,” Raja said.

Corporate Bonds

September was the busiest month for sales of corporate bonds since the euro crisis began, according to data compiled by Bloomberg. Barclays ranked seventh for corporate bond underwriting in the third quarter, with 3.8 percent market share and $37.6 billion of sales, according to Bloomberg data.

“The upside will be in strong FICC and the steady-as-she goes will be in retail and commercial banking,” said Sandy Chen, an analyst at Cenkos Securities in London. “The question mark is whether there are other provisions, perhaps for Libor litigation.”

The lender face class-action lawsuits after regulators found it manipulated the London interbank offered rate, the benchmark for more than $300 trillion of securities worldwide.

Jenkins will still also have to deal with a criminal probe by the U.K. Serious Fraud Office, which prosecutes bribery and white-collar crime, into fees the bank paid in 2008 to Qatar’s sovereign wealth fund as the lender sought to raise money to avoid a government bailout.

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