Barclays May Follow U.S. Peers in Higher Investment Bank Profit

Barclays Plc, the first U.K. lender to report first-quarter results, may report a rise in profit at its investment bank, helped by gains in the U.S. as Europe’s sovereign debt crisis crimps income from the region.

Pretax profit at the unit, led by Rich Ricci, who will step down in June, may rise 5.5 percent to 1.25 billion pounds ($1.9 billion) from the year-earlier period, according to the median estimate of five analysts surveyed by Bloomberg. The company reports earnings tomorrow at 7 a.m. in London.

The firm, which acquired Lehman Brothers Holdings Inc.’s North American operation out of bankruptcy in 2008, is seeking to target the U.S., where income from arranging takeovers and stock offerings is rising, contrasting with a decline in Europe. The London-based bank last week said it plans to expand the securities unit’s focus on the U.S., the firm’s largest source of income after Britain, and named Skip McGee head of its Americas operation.

“The U.S. massively outperformed Europe in the quarter” in investment banking, said Chirantan Barua, an analyst at Bernstein Research in London, who rates Barclays outperform. “Anyone with a bias to the U.S. will do well.”

The investment-banking unit will this quarter account for 57 percent of Barclays’s total pretax profit, more than any other division according to estimates by Jason Napier, an analyst at Deutsche Bank AG in London who rates Barclays a buy. The bank’s consumer businesses, including Barclaycard will contribute 33 percent and wealth management 5 percent.

Debt Swings

Group pretax profit probably declined 12 percent to 2.1 billion pounds from 2.4 billion pounds, according to the median estimate of nine analysts surveyed by Bloomberg. That figure excludes swings in the value of Barclays’s own 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. It also excludes losses on acquisitions and money set aside to compensate customers mis-sold loans.

A spokeswoman for the bank declined to comment.

Fees for arranging U.S. mergers, equity, bond and syndicated loan sales at investment banks climbed 16 percent to $8.9 billion in the year to March 18, according to data compiled by New York-based research firm Freeman & Co. By contrast, fees dropped 15 percent to $3.4 billion in Western Europe in the period, the data show.

M&A Ranking

Barclays is the third-ranked adviser on stock offerings in the U.S. this year, advising on 70 deals valued at $8.67 billion, according to data compiled by Bloomberg. The lender is ranked third in mergers and acquisitions, advising on about $90 billion of deals. JPMorgan Chase & Co. is ranked second and Goldman Sachs Group Inc. fourth.

Among the U.S. banks, Goldman Sachs’s first-quarter revenue rose 1 percent to $10.1 billion. Revenue at JPMorgan’s corporate and investment-bank rose 9 percent to $10.1 billion.

Gains in income from mergers and acquisitions advisory and corporate finance, and other investment-banking business may outstrip an estimated 5 percent decline in revenue at fixed income, currency and commodities business to 2.2 billion pounds, Mark Phin, an analyst at Keefe, Bruyette & Woods Ltd., wrote in a note to investors on April 21. He estimates investment-banking revenue will rise 0.4 percent to 3.45 billion pounds in the first quarter from the year-earlier period.

Unlimited Loans

FICC revenue is likely to decline because a gain from last year’s decision by the European Central Bank to offer firms unlimited three-year loans inflated the year-earlier period, according to Barua. At that time, cheap loans meant banks could value assets such as bonds higher.

Investors may look favorably upon the bank’s results because earnings from advisory and equities are less capital-intensive and therefore less risky than FICC, Barua said.

The bank’s shares have gained 11 percent this year, the best performer among Britain’s five largest banks. HSBC Holdings Plc has gained 5.1 percent and Lloyds Banking Group Plc 3.7 percent in the period. Of the 33 analysts tracked by Bloomberg who rate the stock, 22 have a buy rating, eight hold and three sell.

Chairman David Walker and Chief Executive Officer Antony Jenkins, who took over after the lender was fined an unprecedented 290 million pounds in June for rigging the London interbank offered rate, are trying to cut costs by stripping out layers of management and boost regulators’ confidence in the company. An internal report this month criticized pay at the investment bank and urged the company to boost transparency.

Ricci, 49, will be replaced by Eric Bommensath and Tom King as co-CEOs of corporate and investment banking in May. Peter Horrell, who joined the bank in 1990, will become interim head of the wealth unit, replacing Tom Kalaris.

Barclays has reviewed 75 of its units to weed out those that pose a reputational risk or don’t make profits under its so-called Transform program. It will cut 3,700 jobs as part of the overhaul, which will cost about 1 billion pounds in 2013, according to Barclays. The lender may book between 250 million pounds and 500 million pounds of that charge this quarter, according to four analysts surveyed by Bloomberg.

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