Barclays Posts 35% Jump in Profit on Bond-Trading Revenue

Barclays Plc said profit rose 35 percent in the third quarter as revenue from fixed-income trading surged to the highest in more than two years.

Pretax profit climbed to 837 million pounds ($1.02 billion) from 619 million pounds a year earlier, the London-based lender said in a statement Thursday. Excluding one-time items, profit was 1.7 billion pounds, beating the 1.53 billion-pound average estimate of five analysts surveyed by Bloomberg News.

The results may help Chief Executive Officer Jes Staley convince investors of the advantage of keeping an investment bank even after it posted lower returns than the lender’s other businesses in recent years. Staley has said calls to spin off the unit are “shortsighted” because it serves as a counterweight to the retail divisions, which analysts forecast will be hit by a slowdown in the U.K. economy after the Brexit vote.

“Barclays’s results are significantly better than expected at the headline level, driven by strong performances by the investment bank division and in non-core,” Raul Sinha, an analyst at JPMorgan Chase & Co., said in a note to clients. “Overall, these results show improving momentum in the restructuring story.”

Damping investor sentiment was the bank’s common equity Tier 1 ratio, a measure of its capital strength, which remained static at 11.6 percent. This was largely because the bank’s pension plan swung to a 1.1 billion-pound deficit from a 800 million-pound surplus, trimming 0.3 percentage points from the key capital ratio. The bank also took a further 600 million-pound provision to compensate customers for improperly sold payment-protection insurance.

Staley also confirmed the bank is “in discussions” with the U.S. Department of Justice regarding an investigation into its sale of mortgage securities, but declined to give a timescale for any settlement for the scandal. If the probe, which alleges the bank packaged and sold toxic subprime mortgage bonds that fueled the 2008 financial crisis, results in a substantial fine, Barclays’s capital level would be further reduced.

Barclays swung between gains and losses and traded 1.4 percent higher at 184.3 pence at 10:23 a.m. in London. Still, the stock has fallen about 16 percent this year, even after a rally of more than 40 percent from its trough four days after the June 23 Brexit vote. After a two-year slump, the bank trades at about half its book value.

Trading Revenue
Fixed-income revenue climbed 40 percent from a year earlier to 947 million pounds. Analysts had expected 876 million pounds in revenue from the business, according to the average of six estimates.

The surge echoed the performance of the five major U.S. investment banks, which collectively posted a 49 percent jump in revenue from that business. Bond-market volatility has been spurred by the surprise Brexit vote, divergent views on the direction of central-bank rates and changes in money-market regulations.

Investment-banking fees jumped 29 percent, while equity-trading revenue climbed 11 percent to 461 million pounds.

Barclays “gained quite a bit of market share, particularly in the United States, so we feel good about our investment-bank performance,” Staley said in a Bloomberg Television interview with Manus Cranny.

Analysts expected Barclays’s investment bank to benefit from the pound’s Brexit-driven 2.6 percent drop against the dollar in the quarter, since a large portion of its revenue comes from the U.S. The bank changed its expense target for 2016 to 13 billion pounds from 12.8 billion pounds to reflect the currency move.

Further PPI
The 600 million-pound PPI provision brings the total customer compensation to 8.4 billion pounds. Investec Plc analyst Ian Gordon expected the charge to be 100 million pounds less than that figure in the quarter. Staley said the bank is now fully reserved, given what it knows at present.

British lenders had hoped they’d taken their final charges for PPI, by far the industry’s most costly scandal, but in June the Financial Conduct Authority set a deadline for compensation claims at mid-2019, a year later than banks wanted. Lloyds Banking Group Plc took a 1 billion-pound provision when it reported results on Wednesday.

Barclays made a return on tangible equity in the quarter of 3.6 percent, less than the 10 percent cost of equity investors demand from banks, according to Bank of England research.

To revive the bank’s share price, Staley and his new management team are stripping out costs and focusing on the U.K and U.S. The CEO has pulled the investment bank out of seven countries in Asia, is selling down the lender’s century-old African business and non-core assets and has eliminated about 14,500 jobs . Staley said in the interview that he expects to remove another 3,500 positions by year-end, and a hiring freeze he imposed remains in place.

Barclays is also weighing how to adapt after the U.K. voted to leave the European Union, which could leave London bankers shut out of the bloc’s single market. Staley told reporters that the bank is “engaged in active discussions with the British government and our intent and desire is to stay fully invested in the U.K.”

Asked when he’ll start relocating staff with the U.K. set to lose passporting rights, which allow financial companies to sell services freely around the EU, Staley said there would be no “one momentous decision with a great press conference,” but rather the bank will “make incremental steps” over time.

The firm’s non-core division, which houses the bank’s unwanted businesses and securities, posted a 94 million-pound loss, smaller than most analysts estimated. Risk-weighted assets in the unit were cut by 3 billion pounds in the quarter to 44 billion pounds. Harry Harrison, the head of the bad bank, is attempting to cut risk weighted assets to about 20 billion pounds by 2017. In March, Staley 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.