Barclays announced a large increase in bad debt provisions, becoming the latest bank to prepare for a wave of defaults from individuals and businesses as the coronavirus crisis disrupts the global economy.
Charges for credit depreciation in the first quarter almost quintupled to £ 2.1 billion from £ 448 million in the same period last year, more than double the analysts forecast £ 923 million , the London bank announced on Wednesday.
This charge reduced net profit by 42% to £ 605 million during the period, which was lower than expected by £ 810 million. The Covid-19 coup was partially offset by a 20% increase in the group’s sales to £ 6.3 billion. This is largely due to a 77% increase in trading revenues, the best quarterly performance since 2014, with investment banking enjoying high volumes in turbulent markets.
“This is unprecedented territory in which we find ourselves,” said Jes Staley, CEO of Barclays, in a call with analysts. “After being a member of JPMorgan’s operating committee during the 2008 crisis, it goes beyond that to some extent,” he said, citing historical fluctuations in the financial markets and hundreds of millions of people. unemployment or bankruptcy.
“Given the uncertainty surrounding the developing economic downturn and the environment of low interest rates, 2020 should be difficult,” he added.
The stress was particularly acute at Barclaycard, the credit card industry which operates in the United Kingdom, the United States and Germany, which held £ 885 million in reserves for loan losses linked to viruses. Likewise, its consumer arm, Barclays UK, saw its net profit plunge 60% to £ 175m.
“Revenues were driven by an excellent performance by the investment bank, but the UK was disappointing,” said Joseph Dickerson, analyst at Jefferies. The “maximum pressure” on ultra-low interest rates and shrinking margins will occur in the second quarter.
Barclays shares rose more than 5% on Wednesday morning, but have almost halved again this year.
Within the group’s impairments, around £ 400 million was the result of single-name exposures not specified in the investment bank, and £ 300 million was linked to “the likelihood of an extended period of low oil prices, “said the bank.
The balance of £ 1.2 billion is the result of “an expected deterioration in macroeconomic variables, including unemployment spikes and expected GDP lows for the UK and US economies”, which was only partially offset by the estimated impact of support from central banks and governments overall.
“Barclays has chosen to take a big lead on credit reserves, there is a bit of an attitude to take the trouble and move on American banks earlier,” said Filippo Alloatti, analyst at asset manager Federated Hermes . “The quarter was solid in terms of turnover, especially at the investment banking level, which enabled the group to dynamically build up provisions.”
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The significant increase in loan costs has occurred despite behind-the-scenes pressure from the Bank of England on lenders across the country not to include provisions on “kitchen sinks” and to affect their ability to lend to distressed customers, which the Financial Times reported earlier this week.
Although larger than expected, the increase in reserves for potential loan losses mirrors similar movements by competitors HSBC, Santander in Spain and UniCredit in Italy. This month, the top six US lenders increased provisions for first-quarter loans by $ 25.4 billion, an increase of 350% year-over-year.
The global economic devastation caused by the coronavirus pandemic threatens to undermine Mr. Staley’s turn in Barclays, what could be his last year at the bank he joined in 2015.
President Nigel Higgins is preparing to launch a search for his successor in the midst of an investigation by British regulators into Mr. Staley’s relationship with disgraced financier Jeffrey Epstein.
Meanwhile, activist investor Edward Bramson, the bank’s largest shareholder, campaigned for dramatic cuts to the investment bank and waged an unsuccessful campaign to overthrow the CEO after Epstein’s revelations.
Barclays strengthened its case for preserving its trading arm, as first-quarter fixed income rose 106%, echoing comparable increases on Wall Street and competitors such as Credit Suisse, UBS and Deutsche Bank. Equity trading increased by a fifth, and financial market and M&A advisory commissions also improved.
As a result, overall investment bank pretax profits increased by 45% to £ 1.2 billion over the period, and the lender said so far in April, “Our rate profitability is much higher than in the second quarter of 2019 “.
However, the group’s overall profitability has dropped sharply. Barclays delivered 5.1% tangible return on equity for the quarter, almost half of what it achieved last year, but said “ROTE above 10% remains the right target for the bank over time. “