Barclays First-Quarter Profit Declines as Fixed-Income Shrinks

May 06, 2014 11:42 am ET

May 6 (Bloomberg) -- Barclays Plc, trying to stanch an exodus of senior dealmakers, posted a bigger-than-estimated drop in first-quarter profit as a decline in revenue from trading bonds, currencies and commodities cut earnings from the investment bank by 49 percent.

Pretax profit, excluding swings in the valuation of the lender’s debt, fell 5 percent to 1.69 billion pounds ($2.9 billion), missing the 1.82 billion-pound estimate of analysts provided by the bank, Barclays said in a statement today. Income from FICC, traditionally the largest source of revenue for the investment bank, fell 41 percent to 1.2 billion pounds.

“The fixed-income, currencies and commodities number is a lot weaker than expected,” said Gary Greenwood, an analyst at Shore Capital in Liverpool, England. “Traditionally, Barclays has been a FICC business, so this is a concern. They key questions are: What are they doing with their investment-banking business and how are they going to stem these declines?”

Chief Executive Officer Antony Jenkins, 52, will on May 8 announce details of how he will overhaul the investment-banking division. He’s trying to revive the unit’s profitability by cuttings costs, in particular compensation, without losing key dealmakers. In the past week, he’s lost Hugh “Skip” McGee, the firm’s most senior banker in the U.S., Robert Morrice, chairman of the Asia-Pacific region, as well as investment-banking chairman Ros Stephenson.

Strategic Review

“We are obviously going through a number of changes as part of our strategic review and that may or may not have prompted some people to move on,” Finance Director Tushar Morzaria told reporters on a conference call today. He added the bank’s fixed-income business has seen continued difficult trading conditions in the second quarter.

The stock fell 5.2 percent to 245 pence in London trading, bringing its decline for the year to 9.9 percent. That makes it the worst performing U.K. bank stock this year, according to data compiled by Bloomberg.

Pretax profit at the investment bank fell 49 percent to 668 million pounds from 1.32 billion pounds. Income from equities and providing services to hedge funds -- so-called prime services -- fell 5 percent to 674 million pounds in the quarter, hurt by declines in cash equities and equity derivatives.

Taking Pain

The investment bank results are “much worse than I expected,” said Chirantan Barua, an analyst at Sanford C. Bernstein in London, who rates Barclays a “market perform.” The bank “took the pain, not only in FICC but equities and prime services as well: down 5 percent when it has been up 20 percent plus for two years in a row,” he said. “That’s worrying.”

By comparison, UBS AG reported a 38 percent decline in revenue at its foreign exchange, rates and credit division in the first quarter, the Zurich-based bank said in a statement today. UBS, which decided in 2012 to exit most debt-trading businesses, said its return on equity, a measure of profitability, at its investment bank was 28 percent for the quarter. At Barclays’s investment bank it was 4.7 percent, according to data compiled by Bloomberg Industries.

“We continue to be cautious about the trading environment in which we operate, and as a consequence we remain focused on structurally reducing the cost base in order to improve returns,” the London-based company said in the statement.

Compensation as a proportion of revenue at Barclays’s investment bank climbed to 46 percent in the quarter from 41 percent. Total costs ate up 75 percent of the unit’s income in the first three months of the year, up from 63 percent in the year-earlier period.

Jenkins Review

Under pressure to reduce those costs, Jenkins is preparing to outline the results of a review of the securities unit. Those will include moving the commodities division into a so-called bad bank of unwanted assets and units to be overseen by Eric Bommensath, a person familiar with the plan said last week. The unit may include loans at its European consumer unit, U.S. residential mortgage assets and parts of its corporate books in Spain and Portugal.

Net income rose 15 percent to 965 million pounds in the quarter, beating the Bloomberg median estimate of 934 million pounds of six analysts, helped by a decline in impairments for souring loans. Provisions fell 22 percent to 548 million pounds from 706 million pounds in the year-earlier period.

Pretax profit at the Barclaycard unit climbed 17 percent to 423 million pounds, while the loss at the European consumer and business banking operation narrowed to 88 million pounds from 462 million pounds. Profit at the U.K. consumer and business banking division rose 20 percent to 360 million pounds.