Barclays PLC (LON:BARC) shares fell as it posted an increase in third quarter profits but experienced weak trading in its investment banking arm.
The lender also announced that it would separate its UK division from the group to meet ring-fencing reforms brought in by the government to protect consumers from any financial shocks.
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Barclays is seeking approval from the Prudential Regulation Authority and the High Court of England and Wales to complete the restructuring that will see Barclays Bank UK and Barclays Bank PLC operate independently from one another as subsidiaries of Barclays Group.
The plans were released in a separate statement to the group’s results for the three months to 30 September.
Profits rise but net interest income falls
Profit before tax for the third quarter rose 31% to £1.1bn, reflecting lower customer redress costs in the UK consumer bank.
Attributable profits rose to £583mln from £414mln due to the lack of provisions to compensate UK customers for mis-selling protection payment insurance. The bank set aside £700mln for PPI claims in the first half, taking its total provisions to £9.1bn.
Conduct, restructuring and loan impairment costs fell to a combined £893mln from £1.57bn a year ago.
Net interest income fell by £320mln to £2.47bn and net fee, commission and other income was broadly flat at £2.69bn.
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The corporate and investment bank suffered a 18% decline in revenues, reflecting a sharp fall in revenues from fixed income, currencies and commodities (FICC) trading.
“A lack of volume and volatility in FICC hit markets revenues hard across the industry, and we were no exception to this trend,” said chief executive Jes Staley.
“We did however see an improvement in profitability in BUK (Barclays UK), and a good underlying return from our consumer, cards and payments business, which partially offset the under-performance in markets.”
In reaction, shares fell 5.25% to 186.60p in morning trading.
Investment banks have been hit by lower market volatility following a sharp rise in activity in the immediate aftermath of the Brexit vote last and the election of US Donald Trump.
AJ Bell investment director Russ Mould said the weak trading at the investment bank should come as no surprise given the trend seen in results from global integrated banking peers such as JP Morgan Chase, Citigroup and Bank of America. Still, it "does highlight the cyclical and volatile nature of the unit’s earnings", he said.
"The combination of potentially fickle markets, expensive staff and regulatory pressure mean that the investment banking arm is a low-multiple business in valuation terms and this is weighing upon the rating attributed to Barclays overall by the market."
Staley, who joined Barclays nearly two years ago, is hoping to increase the bank’s return on equity to its highest level in almost a decade by growing the investment bank.
Return on tangible equity (ROTE) at the corporate and investment bank was 5.9% in the third quarter, down from 9.2% last year, while the total return for the group rose to 5.1% from 3.6%.
Barcalys lays out new targets
Under Staley's leadership, he has restructured the business by closing its non-core operations in June, including the sale of the bank's controlling stake in Barclays Africa, to focus on its more profitable core businesses in the UK and the US.
As a result, risk weighted assets fell to £324.3mln in the quarter from £327.4mln last year.
“The completion of our restructuring, and the strength of our capital base today - with our CET1 (common tier equity 1) ratio standing at 13.3% pro forma after BAGL (Barclays Africa Group) regulatory deconsolidation - means we can now turn our full attention towards what matters most to our shareholders: improving group returns,” said Staley.
“We now have high confidence in our capacity to assert when Barclays will start to deliver the economic performance which we know this group is capable of, and therefore today we are announcing new targets for 2019 and 2020 for Barclays.”
The company is targeting ROTE, excluding litigation and conduct, above 10% in 2020 and above 9% in 2019, based on a CET1 ratio of about 13%.
Guidance for group operating expenses, excluding litigation and conduct, is £14.2bn to £14.3bn in 2017 and £13.6bn to £13.9bn in 2019.
Litigation issues continue to weigh
As Staley tackles the group's restructuring, he is currently being investigated by the Financial Conduct Authority and the Prudential Regulation Authority for trying to unmask a whistleblower. The outcome of the investigations are expected to be published as early as December.
Barclays is also facing a helfty fine from the US Department of Justice over the mis-selling of mortgage-backed securities while it has been accused of fraud relating to its 2008 Qatar-backed fundraising.
"Litigation still remains a risk for Barclays, with more than 20 separate investigations ongoing, not least one relating to CEO Jes Staley’s attempt to uncover a whisteblower in his own ranks," said Laith Khalaf, senior analyst at Hargreaves Lansdown.
Khalaf added: "After making some good progress, Barclays appears to be stalling somewhat and it’s now touch and go whether the bank will break even in 2017. With the bank’s restructuring complete, Jes Staley will want to recover some momentum as we move forward into next year."