Barclays outperformed rivals last quarter with a jump in both fixed income and equities trading, but its profits were hit by £500m of litigation and conduct costs, largely related to its blunder when it overissued securities in the US.
Barclays announced the overissuance error at the end of March and it said on Thursday it was still investigating what happened and discussing it with the US regulator. It sold about US$15bn more structured notes and exchange-traded notes than it was allowed to under its shelf filing and needs to buy back and cancel them, which it estimates will cost about £540m.
“To date, we have not found any evidence of intentional misconduct,” chief executive CS Venkatakrishnan told reporters on a conference call. “However, the fact this overissuance occurred reflects a weakness in our controls environment and we are taking steps to address it. We are also enhancing controls in relation to our debt securities issuance activities.”
Venkatakrishnan refused to be drawn on whether the bank could be fined or punished by the US Securities and Exchange Commission, the main regulator on the issue. Barclays said it would not start a planned £1bn share buyback until discussions with US regulators have concluded, which it expects by the end of the second quarter.
“This situation was entirely avoidable and we’re deeply disappointed it occurred,” Venkatakrishnan said.
Barclays said it remains committed to its structured products business in the US and wants to resume issuance of structured notes this quarter. The rescission offer to affected investors should also start this quarter.
Barclays booked £320m of the cost in the first quarter and also took a separate £181m charge to compensate customers sold timeshare loans dating back to a partner firm in 2012.
They were two black marks in otherwise strong results. The bank blew past rivals with its trading revenues, indicating it took considerable market share.
FICC flying
Revenues from fixed income, currency and commodities trading in the January–March quarter were £1.64bn, up 37% from a year ago, led by strong rates trading. Equity trading revenues were £1.05bn, up 13% on the year, aided by equity derivatives. The big five US banks reported flat FICC revenues and a 3% dip in equities, and rivals including Credit Suisse have been far weaker.
“We have benefited from competitor exits from some product areas where we have made strategic investments, including in our equity prime financing business,” said Venkatakrishnan. Credit Suisse is exiting prime services and Deutsche Bank has sold its business to BNP Paribas.
Barclays’ advisory and underwriting revenues in Q1 were £648m, down 25% from a year ago but slightly better than the 37% average drop reported by US rivals.
Barclays’ equity capital markets revenues slumped 81% to just £47m and debt underwriting dropped 8% to £416m, which outweighed a 13% rise in M&A advisory fees to £185m.
Barclays has been taking market share in trading and banking for several years, and many regard it as the strongest European rival to the bulge bracket US firms. Venkatakrishnan said investment in bankers and technology has helped, and it benefited last quarter from several other factors – including limited exposure to Russia or commodities, its product footprint, and idiosyncratric events where it managed risk for clients in volatile markets.
“They all worked in our favour, and the fact you can get all that shows the investment we have made in people and technology in the business is continuing to be rewarded," he said.
Barclays shares were up 2.1% in early trading at 144.9p. "Q1 results very strong despite the structured note matter," said Joseph Dickerson, analyst at Jefferies, in a research note. He said investors would want more clarity on when buybacks will start.
The corporate and investment bank made a pre-tax profit of £1.73bn in Q1, down 1% from a year ago, due to the conduct cost. CIB’s revenues were up 10% from a year earlier to £3.94bn and its return on allocated capital was 17.1%.
Barclays group reported a pretax profit of £2.2bn, down 7% from a year ago due to the litigation and conduct costs. Revenues were up 10% at £6.5bn and RoTE was 11.5%, putting it on track to exceed its 10% target for a second successive year.