Barclays Plunges as Trading Declines, Adding Pressure on CEOBy
Shares fell most since Brexit on Staley’s worst markets result
Markets revenue drops 31%, more than Wall Street rivals
Barclays Plc Chief Executive Officer Jes Staley said he wouldn’t panic after one bad trading quarter. Now he’s had three.
The British bank plunged the most since the aftermath of the Brexit vote after it posted the worst markets performance in Staley’s two-year tenure. Revenue from trading stocks, bonds and currencies fell 31 percent in the third quarter, the lender said Thursday, trailing most Wall Street rivals that posted an average 15 percent decline.
The stock fell as much as 7.2 percent in London trading, wiping more than 2 billion pounds ($2.6 billion) from the value of the company. Barclays has lost about 17 percent this year, making it the worst performer in the Bloomberg Europe 500 Banks and Financial Services Index.
“We obviously want to see a marked improvement in all areas of the markets business,” Staley said on a call with analysts, describing the quarter as “tough” compared with U.S. peers. “The third quarter was clearly a difficult one for us. The lack of volume and volatility hit revenues hard across the industry."
The consecutive declines in earnings will make it harder for Staley to win over some investors skeptical of his strategy to build up the investment bank, which has long been Barclays’s least profitable unit. It also increases pressure on the CEO, who is under investigation by the U.K.’s Financial Conduct Authority for attempting to unmask a whistle-blower. Executives introduced new deadlines Thursday for improving profitability to mollify impatient investors.
Cut to Glory?
“You cannot cut yourself to glory, and those that have tried to do that will ultimately fail,” Staley said on a call with analysts when asked about his decision to invest more in his lowest-returning division. He reiterated his belief that diversified banking groups are better positioned to weather crises.
Barclays isn’t the only European bank losing ground to Wall Street. Deutsche Bank AG, which also reported third-quarter results Thursday, said its trading income declined 30 percent.
Staley has made building up the investment bank the centerpiece of his strategy to revive earnings at Barclays. With division head Tim Throsby, he recently unveiled a plan to reallocate capital from low-returning lending activities to higher-risk trading desks within the division, including distressed debt and exotic products.
“We under-invested in technology and balance sheet in the markets business in the last couple of years and we need to find a better equilibrium there,” Staley said on a conference call with reporters in London. “We’ll get the markets business to where we want it to be.”
To give the securities unit more capital to work with, he’s sold down the bank’s African investment and European consumer networks, slashed shareholder payouts and cut loose tens of thousands of low-returning corporate clients to prioritize the world’s elite fund managers.
Equity and credit trading revenue each dropped more than 20 percent, while rates and foreign-exchange trading, known as macro, fell 40 percent, according to the statement. Macro was blamed for dragging down results in the first and second quarters as well, prompting Throsby to reshuffle management and hire new traders to turn around the desk.
The combined 31 percent plunge at the markets unit is the biggest since Staley took over in December 2015. The next largest drop was 7 percent in the second quarter of last year.
“There’s still a lot of heavy lifting to do” at the investment bank, Jefferies Group LLC analysts Joseph Dickerson said in a note. “Fixed income represented 12 percent of group revenue in the quarter and it will be important to get an update from management as to where the company’s strategy lies in such products.”
The return on tangible equity at the corporate and investment bank fell to 5.9 percent from 9.2 percent a year earlier. The same profitability measure was 18.4 percent at the British retail and cards unit.
While Barclays’ overall pretax profit rose 32 percent to 1.1 billion pounds, it missed the 1.4 billion-pound average estimate of 12 analysts compiled by the bank. Flattering the results, the bank did not top up its reserves for payment protection insurance compensation as it did in the same period last year.
Net operating income fell about 4 percent to 4.5 billion pounds and the lender’s key common equity Tier 1 capital ratio was flat at 13.1 percent.
“Barclays produced a disappointing set of results,” said Edward Firth, an analyst at Keefe, Bruyette & Woods, highlighting the lack of capital generation and impending misconduct fines. “Whilst we have been a seller this year, we had thought Barclays would struggle to disappoint low expectations. It looks like they have succeeded.”
Income at Barclays U.K. fell 5 percent as both the domestic retail and credit card operations reported drops in revenue, according to the statement. Loan impairments fell 43 percent, soothing concerns about a consumer credit bubble in the country.
Executives set new targets for costs and profitability, including a pledge to generate a return on tangible equity of greater than 9 percent in 2019 and more than 10 percent the following year. It’s targeting costs in 2019 to be between 13.6 billion pounds and 13.9 billion pounds.
The lender also updated investors in a separate statement on its plans to create a ring-fenced retail bank, which will be called Barclays Bank U.K. Plc, to comply with U.K. laws requiring consumers to be protected from trading losses.
The disappointing results come against a backdrop of legal cases on both sides of the Atlantic. The bank may go to court to fight the U.S. Justice Department over a multibillion-dollar penalty for selling toxic mortgage-backed securities before the financial crisis. In the U.K., the Serious Fraud Office charged the bank with conspiracy to commit fraud during the bank’s 2008 capital raising from Qatar.
— With assistance by Stefania Spezzati, and Donal Griffin