Barclays (BARC.L) hinted at significant cost-cutting later this year as the British lender warned competition for savers’ money was eating into its margins, even as it reported quarterly profit that narrowly beat expectations. It cut its domestic bank’s net interest margin outlook to 3.05% and 3.1%, as higher savings rates drive customers away and stifle profits from loans and mortgages. It also said it was “evaluating material structural cost actions” to help improve returns, which could incur hefty charges as soon as this year’s fourth quarter.
The re-balancing will likely center on the investment banking business, with Barclays’s sizable fixed income, currency, and commodities (FICC) trading unit in particular set for dramatic action. FICC revenues were down 13% in the second quarter compared to the previous year. They have been stung by the return to volatility in capital markets, which has weighed on client activity and, in turn, fees.
Despite the downturn, Barclays’ results beat forecasts thanks to solid consumer and credit card business performance and a 7% rise in revenue in its global markets division, which includes equities and prime brokerage services. However, the firm’s global investment bank saw income fall by 6%, reflecting volatile markets and a 45% slump in merger advisory fees.
In the third quarter, the firm’s investment banking business generated a pretax profit of £1.8 billion, down from £2.16 billion a year ago. Its net interest margin – the difference between what it earns from borrowing and paying for deposits – was squeezed by higher savings rates and rising competition for depositors. It also weighed on margins in its market businesses, which saw income drop by 4% compared with a year earlier.
Barclays’ net profit for the period was up by 2% at £1.4 billion, with one-off gains from disposals offsetting higher costs and lower revenues. The results helped to lift investor confidence in the firm, but it remains a long way from recovering to its former glory as an investment bank and global finance powerhouse. This has prompted some investors to demand quicker action. Chief Executive C.S. Venkatakrishnan has embarked on a strategy review and trimmed costs, including slashing jobs. This is a sign that the plan to cut back on the firm’s costly and complex structure has momentum, although it is still unclear whether the job cuts will be enough to revive its share price. Shares in Barclays dropped 5% in early trade. (Reporting by John McFarlane; Editing by Mark Potter)
