Investment banking made most of the first quarter profit at British bank Barclays , highlighting the challenge for the lender's new boss in making money as he shrinks that part of the business.
Chief Executive Antony Jenkins was brought in to bring a more ethical approach to Britain's third largest bank after scandals over rate-fixing and big bonuses in the investment banking arm that was built up by his predecessor Bob Diamond.
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Jenkins has pushed out top management and cut pay and jobs and Wednesday's results showed the costs of restructuring contributed to an overall fall in earnings for the lender.
Investment banking profits, however, jumped 11 percent, outperforming rivals Morgan Stanley and Goldman Sachs .
"The big success story is, as ever, Barclays Capital. Importantly it's both a revenue and a cost story," said Ian Gordon, analyst at Investec.
Barclays said last week Diamond acolyte Rich Ricci, the division's head who is known for his love of horse racing and collected a $26 million bonus last month, would be leaving the bank as part of the effort to fix its image.
Over half a billion pounds was spent in the quarter on Jenkins' "Project Transform" overhaul, triggering a drop in adjusted pretax profit to 1.79 billion pounds ($2.7 billion), just below a mean forecast of 1.85 billion.
The investment bank arm made a profit of 1.3 billion pounds by keeping revenues steady and cutting costs. Its income rose 1 percent to 3.5 billion pounds, higher than the 3.3 billion expected by analysts. Growth in equities and advisory offset a fall in fixed income, currencies and commodities.
This success could complicate Jenkins' reforms, as it shows how central the business, dubbed "casino banking" by critics, is to the future of Barclays.
PAY STILL OVER TARGET
Jenkins has said he needs to pay staff competitively but Barclays has been pilloried in the British press for paying huge bonuses when the country is in an economic downturn.
Compensation swallowed 41 percent of the investment bank's income in the first quarter, down from 43 percent a year ago but above Jenkins' target to cut it to near 35 percent.
Ivor Pether, senior fund manager at Royal London Asset Management, a Barclays shareholder, said revenue was strong at the investment bank but he would have liked to have seen its compensation to revenue below 40 percent.
"Then we might have been able to say - yes, there is real evidence there that the cultural changes pursued by the management are showing up in the operations," Pether said.
Rival Credit Suisse also posted steady first quarter revenues at its investment bank, raising expectations for UBS and Deutsche Bank , which report on Tuesday.
Barclays shares hit an early 6-week high but turned lower and were down 1 percent by 1300 GMT, underperforming a 0.4 percent dip by the European banking index <.SX7P>.
Barclays is expected to spend nearly 3 billion pounds on Project Transform over the next three years, including another 500 million pounds this year; axing 3,700 jobs, pruning the investment bank and reforming the bank's culture.
The plan is expected to cut annual costs by 1.7 billion by 2015 and Jenkins said he was confident of meeting that target.
"It's early days but we've put an enormous amount of activity in place and I'm pleased with the progress we've made," he said on a conference call.
Jenkins is attempting to distance the bank from the aggressive, high-risk culture championed by Diamond, who left in July after Barclays was fined $450 million for rigging Libor interest rates.
Other Diamond allies are also leaving the bank, including Tom Kalaris, head of the wealth management division.
Most of the costs incurred so far on restructuring were in its European operations, where it has cut almost 2,000 jobs, and the investment bank, where it is axing 1,800.
Barclays said its core capital ratio was 11 percent at the end of March, and would have been 8.4 percent if new Basel III rules were fully in force.
Scrutiny on UK banks' balance sheets has intensified after the Bank of England last month said lenders needed another 25 billion pounds of capital.
Barclays said it would remain in constant dialogue with its regulators over its capital position, but said it was happy with its capital strength and ability to bolster it with earnings.
($1 = 0.6542 British pounds)
(Additional reporting by Sinead Cruise and Alice Baghdjian; Editing by Carmel Crimmins and Anna Willard)