Barclays sees risk of more conduct costs, cuts profit target

[LONDON] Barclays said it doesn't expect conduct charges to drop anytime soon after rising costs prompted Britain's second-largest lender to cut its profitability target for 2016. The shares slumped.

Third-quarter pretax profit, including restructuring costs, fell 10 per cent to 1.43 billion pounds (S$3.1 billion) from a year ago, the London-based bank said Thursday. That missed the 1.65 billion-pound average estimate of 14 analysts surveyed by Barclays. The bank cut the target for its return on equity to 11 per cent from 12 per cent for 2016, hurt by 560 million pounds for misconduct and redress and a projected 1 billion pounds of restructuring costs.

"Conduct and litigation is at an elevated level" and "we're not really assuming much of a drop off at all," Finance director Tushar Morzaria said on a call with investors. "It will carry on at the kind of elevated levels that we've seen." Banks across Europe are struggling to restore earnings growth as they're battered by surging legal costs.

Barclays on Wednesday named former JPMorgan Chase & Co veteran Jes Staley chief executive officer to help speed up cost cuts and boost profitability. At Deutsche Bank AG, co-CEO John Cryan said on Thursday he will shrink the workforce by about 26,000 people by 2018.

The shares dropped the most since June 26 last year, the day after the lender was sued by New York Attorney General Eric Schneiderman for allegedly lying to customers about practices in its private-trading venue, known as a dark pool. The stock closed down 6.3 per cent at 237.25 pence in London, swinging the bank to a loss of 2.6 per cent this year.

"The legacy and fresh provision for past misdemeanors has again reared its head," said Richard Hunter, head of equities at Hargreaves Lansdown. There is "no obvious end in sight to consigning these issues to history.

Barclays took a 290 million-pound provision to compensate customers who were overcharged for currency trades and set aside 270 million pounds to settle residential mortgage-backed securities claims in the US. While it didn't follow Lloyds Banking Group Plc in taking another charge for wrongly sold payment protection insurance in the third quarter, the total Barclays has set aside for all UK customer compensation this year has now reached 1.3 billion pounds, up from 910 million pounds last year.

Mr Morzaria declined to elaborate on the foreign-exchange charge, calling it a "historical item" that occurred between 2005 and 2012."We are really working though that customer cohort where we believe we didn't apply the most appropriate foreign-exchange rate and are looking to make good on that," he said on a call with reporters. "Our real objective here is to ensure that we come to a fair outcome for affected customers and to deal with that as expeditiously as we can. We believe the provision taken to be prudent and sufficient."

The latest provisions illustrate the challenges faced by American-born Staley, who will take up his post in December. Since joining in April and ousting Antony Jenkins as CEO three months later, Chairman John McFarlane has pledged to deepen cost costs, shrink the investment bank and speed up a restructuring.

"We now have a forward agenda that has been discussed and agreed with Staley," Mr McFarlane said in the statement. "Today's results show another quarter of progress in our core businesses alongside the early effects of some of the changes that we are making." Barclays increased its "core" cost guidance for next year by 400 million pounds to 14.9 billion pounds, largely due to the expense of creating a new ring-fenced UK retail bank, protected from losses at the securities unit, as well as a US holding company.

Return on average equity fell to 5.7 per cent from 6.1 per cent a year earlier. That remains below the cost of equity for UK banks, estimated to be about 9 per cent by analysts. At the investment bank, the measure jumped to 5.2 per cent from 3.1 per cent last year, but fell from the 11.5 per cent reached in the second-quarter.

In a memo to staff on Wednesday, Mr Staley pledged to complete a "necessary transformation" of the investment bank, which has been plagued by surging compliance costs and a slump in profitability. Mr McFarlane said he's working on a plan for "structural reform" that will be agreed with regulators before being presented to investors.

BLOOMBERG