Barclays Rises as Cutbacks, Gain in Trading Ease Profit Dropby
Bank posted $1.4 billion pretax loss at non-core division
Fixed-income trading revenue climbed 10 percent in quarter
Barclays Plc shares climbed as fixed-income trading revenue outperformed European rivals and the bank said the non-core unit will weigh less on profit in 2017.
The stock jumped as much as 9 percent in London, the biggest intraday gain in almost two years, after analysts pointed to a drop in expenses and an increase in capital as bright spots even though profit fell. Pretax earnings, excluding notable items, fell 53 percent from a year earlier to 763 million pounds ($1.01 billion), missing the 985 million-pound average estimate of six analysts compiled by Bloomberg.
Chief Executive Officer Jes Staley in March cut the firm’s dividend in half to give the bank more capital to absorb losses from a quicker rundown of the non-core unit. He aims to close that division by the end of next year, allowing investors to focus more on the bank’s central businesses of U.K. retail banking, credit cards and a transatlantic investment bank.
“The strategy remains the right one in our view,” Staley, 59, said on a call with journalists. “We will reduce our non-core drag by over a billion pounds from 2016 to 2017.”
The bank’s cost-income ratio fell to 65 percent from 69 percent, the lowest that measure has been in at least two years. The bank’s common equity Tier 1 ratio, a measure of its capital strength, rose to 11.6 percent from 11.3 percent in the first quarter.
Barclays’s core units posted adjusted pretax earnings of 1.85 billion pounds on revenue that was little changed. While that profit was down 7.5 percent from a year earlier, it was 10 percent higher than consensus estimates, JPMorgan Chase & Co. analysts led by Raul Sinha wrote in a note to clients.
Revenue from fixed-income trading rose 10 percent to 881 million pounds, while Deutsche Bank AG and Credit Suisse Group AG reported drops in their bond-trading units this week. Barclays corporate and investment bank made a return on tangible equity of 9.5 percent, while similar units at JPMorgan and Morgan Stanley posted returns on equity of 15 percent and 8 percent, respectively.
“Look at the results of U.S. investment banks that printed last week and compare it to the 9.5 percent, and I’d take our number any day,” Staley said in a conference call with journalists. “I feel great about where we came out."
Barclays shares climbed 7.6 percent to 157.65 pence at 11:52 a.m. in London.
The non-core loss of 1.1 billion pounds exceeded estimates of 700 million pounds, driven by a writedown of the French retail business Barclays has agreed to sell, Sinha wrote.
The bank said it expects costs at that unit to drop to a range of 400 million pounds to 500 million pounds next year. That’s down from about 1.6 billion pounds the bank is expected to spend this year, having already booked 950 million pounds of costs in the first half, Staley said in the Bloomberg Television interview with Anna Edwards. Analysts had estimated 2017 costs at the unit of 563 million pounds, said Andrew Coombs, a Citigroup Inc. bank analyst.
“If and when Barclays gets rid of its non-core businesses, it should start to look more like an upstanding citizen of the banking sector, but that is still going to take until 2017 at least, a decade after the banking crisis kicked off,” Laith Khalaf, a senior analyst at Hargreaves Lansdown, said in an e-mail.
The stock has fallen more than 30 percent since Staley took over in December, extending a two-year slump that’s left the bank trading at less than half the book value of its assets. Staley is selling down a century-old African business, pulling the investment bank out of nine countries and has eliminated more than 10,000 jobs, while trying to divest about 50 billion pounds of toxic and unwanted assets.
Staley’s nascent turnaround effort was dealt a blow by Britain’s vote in June to leave the European Union. With the country now facing the risk of a recession and questions over whether the investment bank will be allowed to continue doing business across Europe from London, analysts have slashed the firm’s earnings outlook and called for deeper cost cuts.
“Brexit will be another issue that will require us to adjust how we do our business in Europe, but I’m very confident because of the value we bring to Europe, that we will find a way together with the British government so that Barclays can remain an important presence across Europe,” Staley said in the television interview.
The bank is prepared to shift some of its London operations and jobs to other EU cities if the U.K. loses passporting rights after the Brexit vote, Staley also said on a separate analyst call.
Executives laid out three options under consideration if passporting rights are not part of the deal when the U.K. leaves the 28-nation bloc, including building up an existing subsidiary inside the EU bloc, such as its bank in Dublin. Finance Director Tushar Morzaria pledged Barclays would still hit its financial targets after Brexit and said most of its investment-banking income was not reliant on passporting.
Barclays U.K., the ringfenced British consumer bank, made a pretax profit of 376 million pounds, compared with a loss of 132 million pounds last year. Its return on tangible equity was 6.6 percent. The division was created to comply with a new British law requiring the separation of consumer and investment-banking arms.
The bank took a further 400 million-pound provision to compensate customers for wrongly sold insurance products, bringing the total to 7.8 billion pounds. Lloyds Banking Group Plc didn’t take a provision when it reported results Thursday.
Barclays posted a one-time pretax gain of 615 million pounds from the sale of Visa Europe Ltd., its share of the profits from the Visa Inc.’s $23 billion acquisition of the network.
Barclays corporate and international unit, which houses the investment bank and non-retail operations outside the U.K., made a profit of 1.7 billion pounds in the quarter, down from 1.9 billion pounds a year earlier. The return on tangible equity at the division, a measure of profitability, was 19.2 percent, less than the 22.5 percent it made last year.
Equities trading dropped 31 percent to 406 million pounds. Investment banking fees rose 7 percent to 622 million pounds.