Barclays has announced a sharp increase in provisions for bad loans, becoming the latest bank to prepare for a wave of defaults from retail and corporate customers as the coronavirus crisis upends the global economy.
First-quarter credit impairment charges surged almost fivefold to £2.1bn from £448m in the same period last year, more than double the £923m analysts had forecast, the London-based bank said on Wednesday.
The charge pushed net profit down 42 per cent to £605m in the period, lower than the £810m forecast. The Covid-19 blow was partially offset by a 20 per cent increase in group revenue to £6.3bn. This was largely due to a 77 per cent jump in trading income, the best quarterly performance since 2014, as the investment bank benefited from high volumes in turbulent markets.
“This is unprecedented territory that we are in,” said Jes Staley, Barclays chief executive, during a call with analysts. “Having been on JPMorgan’s operating committee during the 2008 crisis, this is beyond that in some measure,” he said citing historic swings in financial markets and hundreds of millions of people being pushed into unemployment or bankruptcy.
“Given the uncertainty around the developing economic downturn and low interest rate environment, 2020 is expected to be challenging”, he added.
The stress was particularly acute at Barclaycard, the credit card business that operates in the UK, US and Germany, which accounted for £885m of the virus-related loan-loss reserves. Similarly, its consumer arm, Barclays UK, saw net profit plunge 60 per cent to £175m.
“Revenues were driven by a stellar performance at the investment bank, but the UK was disappointing,” said Joseph Dickerson, an analyst at Jefferies. “Maximum pressure” from ultra-low interest rates and narrowing margins will come in the second quarter.
Shares in Barclays rose more than 5 per cent on Wednesday morning but have still almost halved this year.
Within group impairments, about £400m was the result of unspecified single-name exposures in the investment bank, and £300m was related to “the probability of a sustained period of low oil prices”, the bank said.
The remaining £1.2bn was the result of a “forecast deterioration in macroeconomic variables, including expected peak unemployment levels and troughs in GDP for the UK and US economies”, which was only partially offset by the estimated impact of support by central banks and governments globally.
“Barclays has opted to take a big front-loading of credit reserves, there is a bit of the take-the-pain-and-move-on attitude on display at the US banks earlier,” said Filippo Alloatti, an analyst at asset manager Federated Hermes. “The quarter was strong in terms of revenues, especially at the investment bank, and that permitted the group to aggressively build provisions.”
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The significant increase in loan charges came despite behind-the-scenes pressure from the Bank of England on the country’s lenders not to “kitchen sink” provisions and impair their ability to lend to struggling clients, which the Financial Times reported earlier this week.
Although bigger than forecast, the increase in reserves for potential loan losses echoed similar moves by rivals HSBC, Spain’s Santander and Italy’s UniCredit. This month the six largest US lenders increased first-quarter loan provisions by a combined $25.4bn, a year-on-year rise of 350 per cent.
The global economic devastation wrought by the coronavirus pandemic threatens to undermine Mr Staley’s turnround at Barclays, in what could be his last year at the bank he joined in 2015.
Chairman Nigel Higgins is preparing to kick off the search for his successor, amid a probe by UK regulators into Mr Staley’s relationship with disgraced financier Jeffrey Epstein.
Meanwhile activist investor Edward Bramson, the bank’s largest shareholder, has been agitating for dramatic cutbacks at the investment bank and led an unsuccessful campaign to unseat the chief executive after the Epstein revelations.
Barclays bolstered its case for preserving its trading arm as first-quarter fixed-income revenue surged 106 per cent, echoing comparable increases on Wall Street and at rivals such as Credit Suisse, UBS and Deutsche Bank. Equity trading rose by a fifth, and fees from capital markets and M&A advisory also improved.
As a result, overall pre-tax profits at the investment bank rose 45 per cent to £1.2bn in the period, and the lender said that so far in April “our revenue run-rate is well above that of the second quarter of 2019”.
Nevertheless, overall group profitability declined sharply. Barclays recorded a 5.1 per cent return on tangible equity for the quarter, almost half what it made last year, but said “a ROTE of greater than 10 per cent remains the right target for the bank over time”.
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2020-04-29 10:44:55Z
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