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Barclays seen facing US$8.2b more in conduct costs by 2017

Wednesday, February 4, 2015 - 23:31

[LONDON] Barclays Plc faces an additional 5.4 billion pounds (US$8.2 billion) of conduct costs in the next two years, including for its alleged rigging of currency markets and selling unnecessary insurance to customers, Morgan Stanley said.

The UK's second-biggest bank by assets may incur 1.3 billion pounds of charges to settle foreign-exchange probes with regulators and the same amount in fines and civil suits related to rigging the Libor benchmark interest rate, analyst Chris Manners said. A US investigation into the bank's dark pool private-trading venue could cost 300 million pounds this year.

"We model pretax conduct costs of 5.4 billion pounds, which we believe to be somewhat cautious versus the list of known outstanding legacy issues," said Mr Manners, who has an overweight rating on the stock. "We estimate Barclays is around half way through conduct and litigation costs."

Barclays has paid about 6.5 billion pounds to resolve investigations since 2011, including improper selling of payment-protection insurance and a 290 million-pound fine in 2012 for rigging the Libor benchmark interest rate, Morgan Stanley said.

The bank hasn't settled a probe into alleged foreign-exchange rigging, after it dropped out of a group deal in November. The unresolved conduct probes are hindering Chief Executive Officer Antony Jenkins's attempts to change the bank's culture.

The 5.4 billion-pound total figure includes estimated costs for every known issue at Barclays and an additional 1.5 billion pounds for "unanticipated charges," according to the note.

British banks are struggling to put the PPI scandal behind them, which has developed into the most costly to affect the industry since the financial crisis. London-based Barclays may set aside an extra 900 million pounds by the end of 2017 to compensate customers, in addition to the more than 5 billion pounds it's already paid out since 2011, Mr Manners estimated. The bank took a 170 million-pound provision in the third quarter.

Barclays's non-core division is mispriced as its assets are of a higher quality than those of its peers, meaning the scope for losses is lower, Morgan Stanley said. The mispricing could be as large as 20 per cent of the lender's market value, and Mr Manners expects regulatory capital concerns will dissipate as the bad bank winds down and legacy conduct costs are resolved.

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