Barclays Seen With Profit Gain as CEO Fends Off Capital Demands

Barclays Plc, Britain’s second-largest bank by assets, may post a 19 percent gain in second-quarter profit as Chief Executive Officer Antony Jenkins tries to fend off regulators’ calls to raise capital immediately.

Barclays will say pretax profit, excluding swings in the value of its own debt, rose to 2.11 billion pounds ($3.3 billion) from 1.78 billion pounds in the year-earlier period on cost-cuts and increased income from investment banking, according to the median estimate of seven analysts surveyed by Bloomberg. The London-based lender is scheduled to report results on July 30 at 7 a.m. local time.

Barclays, which holds the least capital as a proportion of its assets of Britain’s four biggest banks, has been pressed by regulators to boost that ratio to 3 percent. Jenkins, who took up the job 11 months ago, warned that doing that immediately could force the bank to cut lending, while analysts speculated it could make it sell as much as 6 billion pounds of stock. Barclays is in talks with regulators to delay the move until the end of 2014, according to the Financial Times.

“Extending the deadline by a year would be welcome,” said Shailesh Raikundlia, an analyst at Espirito Santo Investment Bank in London with a buy rating on the stock. “The risk of a capital-raising to meet the leverage ratio has receded.”

Barclays may still have to reduce the size of its balance sheet by 7.5 percent, or 107 billion pounds, to hit the target “without having much impact on profitability” Raikundlia said.

Businesses Cut?

The bank could reduce the size of its 177 billion-pound repo-financing business, where securities such as Treasuries and mortgage bonds are sold with an agreement by the borrower to buy them back later, Morgan Stanley analyst Huw van Steenis wrote in a note to clients. Barclays may also cut loans to other banks or reduce its liquid asset buffer, he said.

The 3 percent target, which aims to limit the risks to the taxpayer in a repeat of the financial crisis, would force banks to hold 3 pounds of equity for every 100 pounds of assets. Both Barclays and Nationwide Building Society, the U.K.’s largest customer-owned lender, fell short of the goal at 2.5 percent and 2 percent respectively. The Prudential Regulation Authority gave Nationwide until 2015 to comply, allowing the mutual to avoid issuing capital that could have forced its member-owners to cede control.

When Jenkins, 52, suggested on June 28 bringing forward the leverage ratio target may choke off lending, the Bank of England responded on the same day that capital plans that restrict credit to the economy “will not be accepted.”

Stock Offering?

Even with the extra time, Barclays may still need to sell as much as 6 billion pounds of stock because the bank, which acquired the North American business of Lehman Brothers Holdings Inc. in 2008, may be required to hold more capital by U.S. regulators, said Mike Trippitt, an analyst at Numis Securities Ltd. with a sell rating on Barclays.

“Recent history suggests that the pessimistic scenario may well become the realistic scenario,” wrote Trippitt.

Barclays spokesman John McGuinness declined to comment as did officials at the PRA in London.

Since taking the top job about a year ago, Jenkins has overseen a 76 percent gain in its shares, second only to Lloyds Banking Group Plc’s 107 percent increase at yesterday’s close of trading. The 40-member Bloomberg Europe Banks and Financial Services Index rose 29 percent in the period.

Jenkins said in February the bank will cut 1.7 billion pounds in annual expenses by 2015, eliminate 3,700 jobs and reduce costs to about 55 percent of income from 71 percent in the first quarter. His cost target matches those of HSBC Holdings Plc and Royal Bank of Scotland Group Plc. HSBC’s costs were 50.8 percent of revenue in the period, compared with 64 percent for RBS, according to company filings.

Cost Cuts

“Jenkins has got to show he’s edging the cost base down and show growth from Barclaycard and the retail business,” said Julian Chillingworth, who helps manage about 20 billion pounds at Rathbone Brothers Plc in London including Barclays shares.

Corporate and investment banking provided about 50 percent of the bank’s revenue last year and its African operations and Absa supplied 11 percent, according to company filings. Barclaycard, the credit card business, contributed about 14 percent, the U.K. and European consumer banking unit about 18 percent and wealth management 6 percent.

Investors “will reward cost discipline” from the bank, Morgan Stanley analysts led by Chris Manners with an overweight rating on the stock wrote in a July 24 note to clients. Costs may have fallen 1 percent, or about 60 million pounds in the quarter, he said.

Investment Bank

Revenue at Barclays’s investment bank, led by Eric Bommensath and Tom King, may have risen by 2 percent in the second quarter to 3.08 billion pounds, Morgan Stanley analysts said.

“Growth should not be as strong as for U.S. banks,” Manners wrote. Fixed income, commodities and currencies, the unit’s largest business, may post a 5 percent revenue increase to 1.85 billion pounds, falling short of its peers because of a “strong” performance in the year-earlier period, he said.

Credit Suisse Group AG, Switzerland’s second-biggest lender, said on yesterday revenue from the fixed-income sales and trading unit rose 13 percent from the second quarter of 2012 to 1.26 billion Swiss francs ($1.34 billion). Its investment bank had a pretax profit of 754 million francs, up from 314 million francs in the year-earlier period as revenue rose 24 percent.

JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc., Bank of America Corp. and Morgan Stanley reported a cumulative 24 percent gain in revenue at their investment banks from the year-earlier quarter, excluding own debt valuations, data compiled by Bloomberg Industries show.

-- Editors: Jon Menon, Simone Meier

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