Barclays’s Investment Banking Revenue Seen Falling 20%

Antony Jenkins’s two-year report card is due tomorrow, and it’s shaping up to be a bleak read.

Barclays Plc’s chief executive officer, who has seen shares slump 19 percent this year following scandals involving high-frequency trading and currency probes, may report that revenue at the investment bank dropped at least 20 percent in the second quarter from a year earlier, according to six analysts surveyed by Bloomberg News. That’s about double the average decline for its U.S. peers.

“It will be all about investment-banking revenue” and cost cutting, said Chirantan Barua, a London-based analyst at Sanford C. Bernstein Ltd. who rates the shares market perform. “A mix of well-known structural headwinds added to a deleveraging business would lead to investment-banking revenue being down 26 percent in the quarter.”

Jenkins, 53, will end his sophomore year with Britain’s second-largest bank embroiled in a U.S. lawsuit alleging it hid the presence of high-frequency traders in its dark pool, or private-trading platform, and negotiating a settlement with the U.K. over a currency-rigging probe. The scandals on both sides of the Atlantic are overshadowing his pledge to overhaul the bank’s culture after it was fined for rigging Libor.

Rate Scandal

The average estimate for first-half pretax profit, excluding costs incurred under the transform program, is 3.62 billion pounds ($6.15 billion), Barclays said July 25. The bank posted pretax profit, excluding gains and losses on the bank’s own debt and compensation charges, of 3.59 billion pounds for the same period last year.

The lender is scheduled to report results tomorrow at 7 a.m. local time. Chris Semple, a spokesman for London-based Barclays, declined to comment.

Oxford-educated Jenkins, a former consumer banker, took over the top job in August 2012 after the scandal over the rigging of the London interbank offered rate cost his predecessor Robert Diamond, a former investment banker, his job.

In May, the CEO announced 7,000 cuts at the investment bank, increasing to 19,000 the number of jobs to go at the company by 2016. Barclays also said it would create a bad bank, run by Eric Bommensath, to dispose of 115 billion pounds of assets.

FICC Revenue

The dark pool accusations made in a complaint by New York Attorney General Eric Schneiderman may thwart Jenkins’s strategy to focus on Barclays’s more lucrative equities business while cutting fixed income, currencies and commodities trading, known as FICC. The imposition of larger capital buffers by regulators and dwindling volatility are curbing revenue from fixed-income trading in Europe.

The bank’s return on average equity in the investment bank fell to 4.7 percent in the first three months of the year from 10.7 percent in the same period of 2013.

Barclays’s FICC revenue, traditionally the largest portion of investment-banking income, slid 41 percent in the first quarter, compared with a 10 percent fall at Deutsche Bank AG. Barclays said in April it’s withdrawing from most of its global commodities activities.

“Revenue performance of the core investment bank remains critical to consensus and building confidence,” Deutsche Bank analysts Jason Napier and David Lock wrote in a July 24 report. “We think it sensible to expect the business to underperform peers until greater operational stability is delivered.”

U.S. Banks

Analysts at JPMorgan Chase & Co. say that European banks’ FICC revenue in the second quarter may beat estimates based on the better-than-expected results of their U.S. peers.

At Deutsche Bank AG, Europe’s largest investment bank, income from trading debt and currencies was 1.83 billion euros ($2.5 billion) in the second quarter, beating the 1.63 billion-euro average estimate of eight analysts surveyed by Bloomberg News. Pretax profit climbed 16 percent.

The five biggest U.S. banks saw their combined FICC revenue fall 9.4 percent to $12.1 billion in the second quarter from a year earlier, data compiled by Bloomberg Intelligence show. In Europe, Credit Suisse Group AG last week posted higher-than-forecast profit at its investment bank.

“Revenue in the investment bank will be the first thing investors look at, followed by capital ratios, followed by cost management,” Napier and Lock said.

Barclays shares gained 0.4 percent to 219.1 pence in London trading. It is the worst-performing U.K. bank stock this year.

Last week, Royal Bank of Scotland Group Plc posted its biggest gain since May 2010 after reporting first-half profit almost doubled as loan impairment charges fell.

Dark Pools

Barclays hasn’t set aside any additional money to compensate clients for improperly sold payment-protection insurance since it made a 1.35 billion-pound provision in July 2013. The lender set aside 650 million pounds in redress for the mis-selling of interest rate swaps at the same time last year.

Barclays fell from second place behind Credit Suisse Group AG as the Wall Street’s largest dark pool operator to 11th after Schneiderman’s complaint June 25. He’s accused the bank of engaging in a “persistent pattern of fraud and deceit” against customers. Trading on its LX platform has since dropped 70 percent, according to data from the Financial Industry Regulatory Authority.

The bank was also sued by an investor over the plunge in trading volume that followed Schneiderman’s lawsuit. Barbara Strougo filed the lawsuit yesterday in Manhattan federal court, saying she bought at artificially inflated prices.

Litigation Losses

The scandal and dip in trading is fueling speculation the bank may close the platform, analysts and finance professors have said. Barclays last week asked a judge to throw out the case, saying it fails to show any investors were harmed and is based on factual errors.

The bank could face as much as 7 billion pounds of litigation losses in the next four years in a “worst-case scenario,” analysts at Nomura Holdings Inc. said in a July 28 report. As such, investors should “ignore any excess capital Barclays may have to offset tail risk from leverage and litigation issues.”

The size of any new provisions will affect the bank’s financial strength. Barclays’s common equity Tier 1 ratio increased to 9.6 percent in the first quarter from 9.3 percent at the end of last year, less than the 13 percent Exane BNP Paribas estimates it will eventually require.

“Any notion that residual capital in non-core might come back to shareholders has disappeared,” Exane bank analysts Tom Rayner and Jonathan Pierce said in a July 17 note. “It is quite simple -- the group needs to retain as much capital as it can.”

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