A curate’s egg for Barclays | FT Alphaville

A curate’s egg for Barclays

Barclays is not joining its peers and promising a pick up in investment banking activity in the remaining months of 2010.

Diamond Bob could, of course, be low-balling expectations but the tone (and figures) of Tuesday’s third quarter results statement from Barclays suggests this isn’t the case.

Group income in October was consistent with the run rate for the first nine months of the year. At Barclays Capital, top-line income in October was consistent with the run rate for the third quarter.

BarCap profits of £756m (down from £978m in Q2) were at or slightly below recently (cough) lowered expectations, as was the top line (£2.82bn, down 14 per cent on Q2, which in turn was down 15 per cent).

Equities and FICC were the worst performers:

Market conditions remained challenging in the third quarter of 2010, with income also affected by a seasonal reduction in activity. Lower demand led to Q3 on Q2 declines in the Fixed Income, Currency and Commodities business of 14 per cent and the Equities and Prime Services businesses of 36 per cent, which more than offset a 9% increase in the contribution from Investment Banking activities.

And the sting in the tail was the cost/income ratio which rose to71 per cent in Q3 (up from 60.5 per cent in the first half and 62 per cent in Q3 last year).

Clearly Bob Diamond, a Chelsea FC fan, is taking the Roman Abramovich approach to wages. BarCap’s CI target is apparently 65 per cent.

Operating expenses increased 21 per cent, broadly in line with the increase in net income excluding own credit. This largely reflected the continuing build-out of our sales, origination, trading and research activities, and increased charges relating to prior year compensation deferrals.

All of that has left analysts wondering how BarCap will achieve the £3bn of Q3 revenues it needs to hit its full year profit target.

Here’s Credit Suisse’s Jonathan Pierce:

The bad news is that October revenues in Barclays Capital were broadly inline with the Q3 run-rate. Given the likely slowdown in December, this implies to us that Q4 revenues will struggle to exceed Q3, leaving top-line income below £6.0bn versus consensus at £6.3bn.

It will therefore be difficult for Q4 group profits to substantially exceed Q3 profits and hence 2010 PBT estimates are unlikely to change enormously, in our view.

However, it’s not all bad news. The shortfall at BarCap was made up by strong numbers in UK banking operation and there was some good news from Barclays on capital, says Pierce.

On the capital front, there is also good and bad news. The good news is that the bank believes it can mitigate £50bn of the £150bn regulatory increase in RWA and is confident that it will not have to ask shareholders for equity.

However, the bank reported £10bn RWA growth in the quarter which we were not expecting. About 70% of that was from market and counterparty credit RWA. While small in the context (and likely to reduce in Q4 as year end b/s management intensifies) it meant that the equity tier 1 ratio was flat at 10.0% in the quarter.

And Barclays has provided some clarity on its exposure to the European periphery which makes for interesting and reassuring reading.

Net exposure to Greece less than £250m, while Irish govenment  debt stands at £503m

And that we guess is a sign of the times.

In early trading shares in Barclays, which have fallen 15 per cent in the past three months, were up 4.8p at 290p.

Related link:
Barclays’ third-quarter profit tumbles – FT