Barclays Shares Slump on Weak Investment Bank--Update

By Max Colchester Features Dow Jones Newswires

Barclays PLC Thursday announced an increase in third-quarter net profit, helped by a fall in conduct and operating costs.

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The British bank said revenue in the quarter was down 5% to GBP5.17 billion ($6.9 billion) compared to a year ago, as bond trading revenues slumped. Net-profit rose to GBP583 million from GBP414 million a year ago.

Like others in the industry, revenue from Barclays's investment bank was hit by low market volatility. The bank's markets business revenue slumped by 30% year-over-year. This was somewhat offset by the bank's U.K. retail and card business.

Barclays clarified its targets, saying it would have a return on equity of greater than 9% in 2019 and greater than 10% by 2020. Currently, the bank's return on equity is 5.1%.

Costs in 2019 will be between GBP13.6 billion and GBP13.9 billion, excluding litigation and conduct charges and other investments. But the bank didn't make clear when it would increase its dividend. That announcement will likely be made during the bank's full-year presentation early next year.

"We can now turn our full attention towards what matters most to our shareholders: improving Group returns," said Barclays Chief Executive Jes Staley.

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After ditching billions of assets, cutting 60,000 staff and exiting over a dozen countries including most of Africa, the British bank is moving into the next stage of a plan to shed costs.

But investors are still to be convinced. Year to date Barclays has the worst performing share price of any major European bank. A big question is whether Barclays is capitalized enough to meet new regulations and any potential settlement with U.S. authorities over its alleged role in the packaging of U.S. subprime mortgages.

Investors also fret about the amount of resources the bank will have to pour into its investment bank to make it competitive.

A cloud also hangs over Mr. Staley, who is being probed over his efforts to unmask a whistleblower who raised flags about a hire the U.S. banker made.

Write to Max Colchester at max.colchester@wsj.com

LONDON--Can Barclays PLC Chief Executive Jes Staley run a profitable investment bank on the cheap? Investors aren't yet convinced.

Shares in the British bank fell 5% in early trading Thursday as the bank reported its investment bank trading engine stuttered in the third quarter of the year.

Like others in the industry, Barclays's investment bank was hit by low market volatility pinching trading revenues. The bank's fixed income trading dropped 34% in the quarter, which was better than its European rival Deutsche Bank AG but still lagged behind several of its U.S. peers.

Overall the bank recorded a third-quarter profit, helped by a fall in conduct and operating costs. But the share drop reflects how investors are increasingly skeptical that Mr. Staley can build a competitive, and profitable, investment bank without pouring in huge resources.

Barclays is currently looking to sweat capital out of its corporate lending book and redeploy it into its investment bank. On Thursday, Mr. Staley laid out his plan to improve the markets business, which has included bumping up leverage and the recent hiring of around two dozen new bankers. Fixing the unit is priority, as around 60% of the group's capital is locked up in the business, according to Claire Kane, an analyst at Credit Suisse.

Unlike its major U.S. competitors, capital is tight at Barclays and there was still no sign on when it would increase its dividend. That announcement will likely be made during the bank's full-year presentation early next year. Mr. Staley said that the issue of capital at the bank "was off the table" and that shareholders are mainly worried about dividends.

Following gripes from investors that the group's strategy was too vague, Barclays on Thursday clarified its targets saying it would have a return on equity of greater than 9% in 2019 and greater than 10% by 2020. Currently, the bank's return on equity is 5.1%. Costs in 2019 will be between GBP13.6 billion and GBP13.9 billion (between $18 billion and $18.4 billion), but that excludes litigation and conduct charges and other investments.

The British bank said revenue in the quarter was down 5% to GBP5.17 billion compared to a year ago, as bond trading revenues slumped. Net profit rose to GBP583 million from GBP414 million a year ago, bolstered by the bank's U.K. retail operations offsetting the pain felt in the investment bank. Lower costs and conduct fines helped too.

After ditching billions of assets, cutting 60,000 staff and exiting over a dozen countries including most of Africa, the British bank is moving into the next stage of a plan to shed costs. Year to date Barclays shares are down 12%, among the worst performing share price of any major European bank.

Conduct issue continue to weigh on the bank. Tightening regulations and a potential settlement with U.S. authorities over its alleged role in the packaging of U.S. subprime mortgages, could all eat into capital levels. Meanwhile after a deluge of unsecured lending in the U.K. and the U.S., some analysts fear a spike in impairments which could hit Barclays hard.

A cloud sits over Mr. Staley himself. The banker is being probed over his efforts to unmask a whistleblower. But Barclays did put one legal matter behind it during the quarter: It said it had reached a $105 million agreement in principle with the U.S. Federal Energy Regulatory Commission over the banks alleged role in manipulating electricity markets in the Western U.S.

Write to Max Colchester at max.colchester@wsj.com

(END) Dow Jones Newswires

October 26, 2017 04:37 ET (08:37 GMT)