Barclays signals economic pain ahead with bad loan charges

London

BARCLAYS said it expects a prolonged stretch of economic contraction and bad loans, overshadowing the success of its traders in the novel coronavirus pandemic.

US and UK unemployment, a key variable for souring credit, "is now expected to be heightened for a prolonged period", the London-based bank said on Wednesday as it reported second-quarter earnings.

It took a £1.6 billion (S$2.9 billion) charge to anticipate bad loans, which brought the total to £3.7 billion so far this year - more than analysts anticipated.

The gloomy outlook illustrates the limits of chief executive officer (CEO) Jes Staley's bet on investment banking and trading in an environment where the British economy faces its worst downturn in three centuries.

There has been "extraordinary economic contraction", especially in the US and UK, the bank's two principal markets, he said on Bloomberg Television.

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The firm downgraded its forecasts for the UK and the US economies and consequently had to bolster its provisions. It now assumes UK unemployment might surge to 6.5 per cent next year, up from a 4.5 per cent assumption when it reported first-quarter figures.

If British unemployment reaches 7 per cent, Deutsche Bank analysts have estimated the nation's banks might book up to £40 billion in provisions over two years.

Barclays' securities division defied the gloom, reporting a 60 per cent gain in foreign exchange, rates and credit income, though some analysts expected bigger gains after Wall Street's blockbuster quarter. Mr Staley, too, warned that growth at the securities unit is set to slow.

Volatility in the first two quarters was exceptional this year, said the CEO. "People are expecting a normalisation," he added.

The stock fell 4 per cent in London trading. Barclays, the first British bank to report quarterly earnings, has slumped about 40 per cent this year. That is still a better performance than NatWest Group and Lloyds Banking Group, domestically-focused peers without substantial securities businesses.

"These results aren't exactly unexpected, but they paint a pretty bleak picture of the UK economy," said Nicholas Hyett, equity analyst at Hargreaves Lansdown.

Barclays expects that impairments in the second half will fall from the first-half level. It also took a £186 million impairment related to a single client that it did not identify.

The credit card and payments unit booked a loss for the first six months of the year. The bank has said it expects the income at this business to recover, but headwinds, including low interest rates, are likely to persist into next year.

The division recently stopped taking new applicants for a co-branded credit card with Uber Technologies, one of its highest-profile cards in the US market.

Barclays had previously indicated that quarterly impairments should run between £800 million and £1 billion per quarter this year. Analysts expected a £1.4 billion hit in the second quarter.

The bank said there are "early signs of credit deterioration" in UK unsecured lending, a business whose growth Barclays slowed down as the pandemic crisis gathered pace.

Second-quarter net income fell 4 per cent from a year earlier, in line with estimates. Pretax profit fell 77 per cent, worse than the 69 per cent consensus analyst estimate. Equities income jumped 35 per cent, beating the 3 per cent consensus estimate.

Two of Barclays' European peers reported figures that also showed the diverging fortunes of trading businesses and domestic economies.

Spain's Banco Santander took a US$14.8 billion hit related to Covid-19's effect on the economic outlook. In Germany, Deutsche Bank reported its biggest fixed-income trading gain in almost eight years. BLOOMBERG