- Retail banking margin forecast falls short
- Investment bank underperforms peers
- Yet another restructuring in the works
The UK bank reporting season got underway with a disappointing third-quarter update from Barclays (BARC), which managed to disappoint both on the retail front and the investment banking front.
Given the shares were already down 12% year-to-date, optimists may have been hoping for a small bounce but the shares quickly turned lower falling more than 6% to 134p in early trading, taking them to the bottom of the FTSE 100 performance table and a fresh six-month low.
GROWING HEADWINDS, LOWER MARGINS
At the group level, third-quarter income was up 5% to £6.26 billion while operating costs were almost flat at £3.95 billion, which was a creditable performance.
However, an absence of writebacks and an increase in provisions for bad loans meant pre-tax profit was 4% lower at £1.88 billion while an increase in corporate taxes meant net profit was 10% lower at £1.54 billion, missing market estimates.
In the core UK business, the loan book was flat at around £205 billion thanks to the addition of Kensington Mortgage Company but deposits shrank by 6% to £243 billion as customers withdrew money from their current accounts either to fund spending or to put on deposit at higher rates.
Income increased just 1% on an underlying basis to £1.9 billion thanks to a surge in the net interest margin to 3.15% against 2.78% a year ago, which offset mortgage margin pressure and the drop in deposits in the ‘search for yield’ although the bank cautioned both these negative trends increased during the quarter.
The big disappointment for investors, however, was the fact full-year net interest margins are seen falling to between 3.05% and 3.10% rather than increasing from their third-quarter level.
ONE DOWN ON WALL STREET
Capping the disappointing outlook for retail margins, Barclays posted lower-than-expected third-quarter revenue from its investment banking business despite the strong performance of US peers such as JPMorgan Chase (JPNM:NYSE) and Citigroup (C:NYSE) who reported earnings last week.
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The bank only managed to generate £3.08 billion of revenue, a drop of 6% on last year, against market forecasts of £3.24 billion, as lower client activity in both global markets and investment banking fees more than offset the increase in interest income from higher rates.
Finally, the bank said was evaluating actions to reduce its structural costs ‘to help drive future returns’, which meant it could incur ‘material additional charges’ in the final quarter of the year, another factor which weighed against the shares.
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