(Bloomberg Opinion) -- Barclays Plc Chief Executive Officer Jes Staley has proved skeptics wrong: Hanging on to the British bank’s large securities business has been a blessing, especially during the pandemic.
Staley was under pressure at various points to cut back on riskier trading activities. He held off and his firm — like its Wall Street peers — has prospered, riding the wave of trillions of dollars injected into ravaged economies by central banks and profiting from the insatiable appetite for financial assets that offer a decent return in a low-yield world. But this Barclays profit driver shows signs of peaking, and it’s not clear what will replace it. Digital payments of the type offered by Square Inc. might be one answer, although this could require heavy investment.
A bumper first quarter for trading equities — where revenue rose by 65% — was spoiled by a weaker performance in bond and currency trading, which declined by 35%. That’s much worse than the average 17% increase in the same business for its U.S. peers. Staley suggested that the underperformance in part reflected his firm’s prudence, and in fairness the Barclays equity team did dodge the Archegos Capital implosion that has cost some rivals billions of dollars.
Overall, profitability at the investment bank was probably close to a record, buoyed by a rebound in fees from advising on mergers and initial public offerings and an absence of credit impairments. Return on tangible equity stood at a highly respectable 17.9%, while the division’s 1.8 billion-pound ($2.5 billion) income made up three-quarters of group pretax profit.
Unfortunately for Barclays, markets activity is starting to normalize in the second quarter, according to some of its peers, so some of its achievements — impressive as they are — feel like a one-off. Costs at the securities unit are also creeping up at a worrying pace. Though the first-quarter increase was driven chiefly by paying bonuses, additional accruals of 335 million pounds were almost double the average from last year.
That puts the onus back on the bank’s British and American consumer-lending business, but it may take a while before many shoppers burn through their pandemic savings and start loading up on their credit cards again. Profitability in the U.K. will be squeezed this year, Barclays has warned, with the net interest margin (the difference between the interest it pays and the interest it charges customers) possibly dropping to as low as 2.4%. It was 2.9% a year ago. A record quarter for underwriting mortgages in Britain, made possible by a tax holiday on home purchases, will be hard to repeat.
There are more structural charges on the way, too. The bank is reviewing its property estate this year, which could lead to extra expenses as it exits leases.
At least Staley is looking beyond the trading bonanza in trying to identify future growth. The bank detailed for the first time how much money it makes from handling electronic payments for business and retail customers. At 1.7 billion pounds, this revenue makes up about one tenth of the group’s total, and could increase by 900 million pounds by 2023.
Staley said the “extraordinary valuations” of digital-payments peers such as Square weren’t lost on him. While Barclays has impressive scale in this business, it will only be able to make Square-type margins if it catches up on the technology.
The bank has a decent backdrop to explore such opportunities, from the strongest economic rebound in decades in Britain and the U.S. to expectations that interest rates will rise soon. It may even be in a position to follow peers in releasing reserves later this year. But the shares dropped as much as 7.5% on Friday, which tells its own story. If the trading bonanza is coming to an end, investors will want something more concrete about what will replace those revenues.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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