Barclays reported a big drop in provisions for bad loans in the third quarter as the initial economic shock from coronavirus subsided, while revenue at its trading arm continued to surge in turbulent markets, driving better than expected profits.
The UK bank took £608m of credit impairment charges in the three months. Although that was about a third higher than the same period last year, it was well below the £3.7bn set aside in the first half of 2020 and less than the £1bn that analysts had forecast.
Jes Staley, chief executive of Barclays, said on Friday it had been a “historically challenging year” and warned that “income headwinds in the UK are expected to persist into 2021, including the low interest rate environment”.
While he added that he did not expect loan loss provisions to reach a similar level in 2021, a rise in new Covid-19 infections and renewed restrictions on businesses led Barclays to downgrade its economic forecasts for the UK.
It now expected the British economy to contract 10.3 per cent this year, versus 8.7 per cent in June, but said unprecedented government support programmes continued to delay the expected wave of company defaults and rise in unemployment.
The lower credit charges and positive surprise on earnings pushed up Barclays’ stock 4.5 per cent on Friday. It has declined 37 per cent this year.
Quarterly net profit rose to £611m, from a loss of £292m last year, when there were £1.6bn of litigation and misconduct charges largely related to the payment protection insurance scandal. Analysts had estimated Barclays’ net profit would be £201m. Revenue fell 6 per cent to £5.2bn, beating expectations of £4.8bn.
“We were looking for strength in markets revenue and a material beat on the credit expense line. We have both of these today,” said Joseph Dickerson, analyst at Jefferies.
The majority of charges for potential loan losses came in Barclays’ consumer and credit card businesses in the UK and the US. However, the bank did return to profit in that area in the three months through September as consumer spending recovered.
For the third consecutive quarter, the pandemic-related pain in the retail and commercial units was offset by big jumps in trading income, as the investment bank once again benefited from heightened client activity in choppy markets.
Fixed-income revenue surged 23 per cent — similar to the increases recorded by Wall Street rivals such as JPMorgan Chase, Goldman Sachs and Morgan Stanley last week.
Elsewhere in the investment bank, equity trading revenue rose even further — by 40 per cent, beating the average 15 per cent rise from US banks — but fees from mergers and acquisitions advisory plunged as few deals were sealed during global lockdowns.
Overall pre-tax profits at the investment bank rose 13 per cent to £1bn. UBS reported similarly buoyant performance at its securities unit earlier in the week.
The performance will bolster Mr Staley’s strategy to maintain Barclays’ trading arm, which he has long argued is a necessary counterbalance to its UK retail and credit card businesses that are more vulnerable in recessions.
The investment bank has been subject to a multiyear attack from activist investor Edward Bramson, who has led several unsuccessful campaigns to shrink the division and unseat the chief executive.
A major reason for the sharp drop in Barclays stock this year is a regulatory ban on British banks paying dividends during the Covid-19 crisis, analysts said. While Mr Staley said he supported regulators’ cautious stance, he felt Barclays was “extremely well capitalised, profitable, highly reserved . . . that gives us a degree of confidence” and said the lender might be allowed to restart shareholder payouts next year.
The chief executive also addressed the prospect of the Bank of England imposing negative rates in the UK to try to stimulate spending by charging companies and individuals for making deposits.
“We think it is appropriate that regulators keep negative rates as a potential tool but don’t think it’s likely,” said Mr Staley. “Zero negative rates are very tough for banks, that is well known” and he cautioned there could be a risk that consumers would withdraw their money from accounts to keep it in cash.
Mr Staley — who is being investigated by UK regulators about his relationship with deceased paedophile financier Jeffrey Epstein — is in the final years of his tenure. He recently installed two of his top lieutenants in senior positions at the investment bank to “prove their mettle” in revenue-generating roles, the Financial Times reported last month.
Mr Staley said there were numerous talented internal candidates to succeed him, but “I am not quite ready to push off the dock yet”.