Barclays down 6.5% after warning of fourth-quarter cost-cutting charges

Barclays C.S. Venkatakrishnan stated that the bank had "continued managing credit well, remaining disciplined on costs, and maintained a solid capital position" in a "mixed-market backdrop."

Analysts surveyed by Reuters produced a consensus prediction of PS1.18billion, down from PS1.33billion in the second quarter to PS1.51billion for the same period in 2020.

LONDON

Barclays

Investors feared that cost-cutting measures, pressure on interest margins in the domestic market and poor performance of previously strong divisions would lead to a decline in shares on Tuesday.

The bank's net profit for the third-quarter was PS1.27 billion ($1.56billion), slightly above expectations, as its strong consumer and credit cards businesses offset a decline in investment bank revenues.

Reuters polled analysts who produced a consensus of PS1.18billion, down from PS1.33billion in the second quarter to PS1.51billion for the same period in 2020.

Other highlights of the quarter include:

CET1 ratio (a measure of financial strength) was 14% in the third quarter, up from 13.8% during the previous period.

The bank's return on tangible equity was 11%. It aims to reach 10% by 2023.

The group's total operating costs were down by 4% on an annual basis to PS3.9 billion, as "efficiency savings" and "lower litigation and conduct fees" offset inflation, growth in business and investments.

Barclays C.S. Venkatakrishnan stated that the bank had "continued managing credit well, remaining disciplined on costs, and maintained a solid capital position" in a "mixed-market backdrop."

We see additional opportunities to increase returns for shareholders by cost-efficiency and disciplined allocation of capital across the Group.

Barclays' investor update will include its revised financial targets and capital allocation priorities, along with its full-year results.

Barclays Corporate and Investment Bank (CIB) reported a 6% drop in income to PS3.1 billion. The bank cited reduced client activity on global markets as well as investment banking fees.

The traditionally strong fixed income, currency, and commodities trading division saw its revenue fall 13% due to a decrease in trading volume as the market volatility slowed.

This was partly offset by a 9% increase in revenue for its Consumer, Cards and Payments (CC&P), which amounted to PS1.4 billion. This was due to higher balances of U.S. credit cards, and a transfer from Barclays U.K. of the Wealth Management and Investments (WM&I) Division.

After the July announcement of a PS750 million share purchase, the bank has not announced any further capital returns to shareholders.

Cost-cutting charges in advance

Barclays has hinted that it will announce substantial cost-cutting later this year. It said in its earnings report, "the group is evaluating actions to reduce structure costs to help boost future returns. This may result in additional material charges in Q423."

The bank's cost-income ratio was 63% in the third quarter, but it has set a target for the medium term of less than 60%.

Barclays has cut its forecast of the net interest margin for the U.K. Bank to a range between 3.05% and 3.1%. This is down from a previous guidance of approximately 3.15%.

The bank warned of its concerns in its second quarter earnings

It expects to earn lower interest in its U.K. Division, as the net interest margins of its domestic bank are under pressure due to increased competition for depositors' funds during a tough period for household finances.

Market participants were hesitant about the prospect of margin pressure and cost-cutting measures. The shares of the bank fell as much as 6.5% at 09:16 in London.

Mixed results

John Moore, senior investor at RBC Brewin Dolphin said that while Barclays' headline results exceeded expectations, the "really mixed" set of results reflected a "increasingly difficult backdrop".

Moore wrote in an email on Tuesday that "Sentiment is generally sour, due to the fact that U.S. Regional Banks are struggling with lower-than-expected net interest margins as well as issues like the well publicised problems of Metro Bank."

Barclays investment banking division has also been experiencing a difficult market, with low deal activity. Barclays' other banking operations, particularly the consumer and credit cards business, are resilient. With capital to invest, Barclays may be able to benefit as smaller competitors struggle in this environment.