Barclays Weighs Asset-Reduction Increase Amid FX Probe

Barclays Plc, Britain’s second-biggest bank, is preparing to step up its asset reduction target and said it’s being probed by regulators investigating the possible manipulation of foreign-exchange markets.

Chief Financial Officer Tushar Morzaria will lead a review that will decide whether the lender will increase its 80 billion-pound ($128 billion) target, Chief Executive Officer Antony Jenkins told reporters on a conference call today as the lender posted a 26 percent fall in third-quarter pretax profit. The company plans to publish the result early next year.

Barclays this month raised 5.8 billion pounds in a rights offering after the bank in June was found one of two British lenders to miss stricter capital rules. The U.K.’s Prudential Regulation Authority is imposing a 3 percent leverage ratio, forcing banks to hold 3 pounds of equity for every 100 pounds of assets. Jenkins, 52, said today the London-based lender is on track to meet that requirement by June.

“It’s good news, it’s what needs to be done, but it’s going to be a long time before the leverage debate is over,” said Chirantan Barua, a banking analyst at Sanford C. Bernstein Ltd. in London, who rates the bank market perform. “But, how much money do you lose on it by removing the assets, and if it’s nothing, what was it doing there in the first place?”

‘Absolute Certainty’

The lender has reduced assets by about 20 billion pounds so far, Deutsche Bank AG analysts led by Jason Napier estimated in a report to clients today. Jenkins told analysts on a call that he can say “with absolute certainty that over time, we’ll achieve more” than the 65 billion pounds to 80 billion pounds in deleveraging announced earlier this year.

Barclays closed at 268.45 pence in London, up 0.9 percent. It has advanced 11 percent this year, lagging Lloyds Banking Group Plc’s 62 percent gain. Royal Bank of Scotland Group Plc has risen 13 percent and HSBC Holdings Plc is up 5.7 percent.

RBS is scheduled to release third-quarter earnings on Nov. 1, followed by HSBC on Nov. 4. Lloyds yesterday posted a wider third-quarter loss after setting aside money to compensate clients wrongly sold payment-protection insurance.

Trading Review

Barclays also said it’s cooperating with requests for information from regulators probing the manipulation of foreign-exchange benchmarks. The bank is reviewing its trading over a “several year” period, it added.

Bloomberg News reported in June that traders at some banks said they shared information about their positions through instant messages, executed their own trades before client orders and sought to manipulate the benchmark WM/Reuters rates. The U.K.’s Financial Conduct Authority has opened a formal probe, joining regulators such as in the U.S. and the European Union.

Regulators are scrutinizing an instant-message group senior traders at firms including Barclays, Citigroup Inc. and RBS used to pool details of their positions and client orders, people with knowledge of the matter said earlier this month. Barclays has about 10 percent of the foreign-exchange market after Deutsche Bank and Citigroup, according to a survey by Euromoney Institutional Investor Plc. Jenkins declined to comment on the probe, calling it an “ongoing investigation.”

Investment Bank

Pretax profit, excluding gains and losses on the bank’s own debt, fell to 1.39 billion pounds in the third quarter from 1.87 billion pounds in the year-earlier period, matching the median estimate of 11 analysts surveyed by Bloomberg.

Revenue from fixed income, currencies and commodities dropped 44 percent to 940 million pounds, the lowest since 2011. That pushed investment-banking revenue 22 percent lower to 2.11 billion pounds. Jenkins said on the call today that he expects “the FICC revenue pool to shrink over time.”

Equities revenue rose 23 percent to 645 million pounds in the third quarter from a year ago, while investment banking income increased 7 percent to 525 million pounds.

By comparison, the five biggest U.S. investment banks saw their combined revenue from FICC trading slide 25 percent from a year ago, data compiled by Bloomberg Industries show.

Credit Suisse Group AG, Switzerland’s second-largest bank, last week reported third-quarter earnings that missed analyst estimates as profit at the investment bank dropped on a 42 percent decline in revenue from fixed-income sales and trading. At Germany’s Deutsche Bank AG, revenue from trading debt and other products declined 48 percent in that period.

FICC Slump

Banks have seen a slump in fixed-income trading, a key portion of their earnings, as investors waited to see whether the U.S. Federal Reserve will begin reducing economic stimulus. The Fed’s September decision not to taper its $85 billion in monthly bond purchases, sent the yield on 10-year Treasury bonds down the most in almost a year.

Barclays’s profit was also hurt by 101 million pounds of restructuring charges in the third quarter linked to Jenkins’s company overhaul called Transform program, which seeks to make the lender more profitable by eliminating 3,700 jobs.

“I am not complacent and my executive team know we must push harder in the final quarter and into 2014,” Jenkins said in the statement. “We continue to reassess the balance sheet for further leverage reduction opportunities consistent with preserving our strong franchises, supporting lending to the U.K. economy and meeting the Transform program targets.”

Qatar Probe

Barclays posted a third-quarter net income of 511 million pounds compared with a loss of 183 million pounds a year earlier, as a 700 million-pound provision to compensate clients payment protection insurance, or PPI, that didn’t cover them or they didn’t need, wasn’t repeated. Operating expenses fell 2 percent to 4.26 billion pounds in that period.

Profit at the bank’s U.K. consumer and business banking unit slipped to 351 million pounds in the third quarter from 358 million pounds. Barclays didn’t set aside additional money for PPI after a 1.35 billion-pound provision in the second quarter.

The lender said it’s also being probed by regulators over whether it properly disclosed 322 million pounds of payments to Qatar’s sovereign wealth fund as part of a 7 billion-pound fundraising during the financial crisis, a move that helped the bank avoid a government bailout. The U.K. markets regulator said last month it may fine the bank 50 million pounds. Barclays said today it’s still contesting the findings.

Barclays is drawing up plans to revamp its pay structure to counter European Union rules on executive compensation, a person with knowledge of the discussions said earlier this month. The lender may give executives an additional cash payment on top of base pay and variable bonuses to control fixed costs, the person said. Jenkins told reporters on the call today that no decision has been taken on the compensation plan.

(Updates with comment from CEO in last paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE