Barclays $2.6 Billion Bad Loans Overshadow Trading Surge

(Bloomberg) -- A blockbuster quarter for Barclays Plc’s traders was overshadowed by a 2.1 billion pound ($2.6 billion) bad-loan charge stemming from the coronavirus pandemic.

The securities division reported a 77% jump in first-quarter trading revenue on Wednesday as the virus whipsawed markets, beating the average 30% gain at U.S. peers. However, the lender set aside its biggest quarterly provision in a decade to cover defaults across the economy, and joined peers in warning of tough times ahead.

The shares rose nearly 7% in London, leading gains among European bank stocks, as the strong trading performance helped Barclays preserve its capital levels.

The chaos stemming from the pandemic was a boon for trading desks that benefited from the volatility. Barclays traders join their counterparts at UBS Group AG in having a record quarter and surpassing Wall Street, and the bank said the spike in activity had continued in the second quarter, with revenues well above levels seen a year ago.

However, the pandemic and its aftershocks have crippled corporate clients in entire industries, and Barclays said its worst-case scenario anticipates 17% U.S. unemployment, as well as the U.S. and U.K. economies contracting by almost half at the worst point.

The bank’s U.K. business is already feeling the strain, with pretax profits down by about two-thirds compared to the same quarter a year ago.

“Given the uncertainty around the developing economic downturn and low interest rate environment, 2020 is expected to be challenging,” Chief Executive Officer Jes Staley said in the earnings statement.

New accounting standards mean banks are trying to anticipate how businesses and consumers will be affected by lockdowns aimed at stemming the virus’s spread. Worsening credit quality will be “much more visible in the second quarter and beyond,” analysts at UBS have said.

Barclays’ pretax profit tumbled 38% to 913 million pounds, missing analyst estimates. The impairment charge is “much larger” than what the market expected, Joseph Dickerson, an analyst with Jefferies Group LLC in London, wrote in a note to clients. The provision “looks very credible and more like what we have seen at U.S. peers than European ones.”

Some of Barclays’s rivals have announced much bigger provisions. JPMorgan Chase & Co. said it would likely add more to loan-loss provisions in the second quarter after boosting them by more than $11 billion in the first three months of the year. HSBC Holdings Plc said this week that it expected as much as $11 billion of damage this year because of the outbreak.

Staley said in a Bloomberg Television interview that the securities unit’s performance showed the diversification benefit of having a universal bank that combines investment and consumer banking. Staley’s strategy to build the investment bank, which has been less profitable than other divisions, has faced repeated attacks from activist investor Edward Bramson.

“In the markets business, we have stayed invested in the last four years across all the asset classes, we’ve stayed very engaged with our clients,” Staley said. “The performance was very much driven by the volume of securities that we were trading with our clients, it was not based on any particular decision or direction that we had going in, so we feel very comfortable about it.”

Barclays said a key measure of its capital strength, known as core equity Tier 1, fell to 13.1% in the quarter, well above its target, as the surge in trading helped to offset impairments.

Wednesday’s statement made no mention of regulators’ enquiries into Staley’s account of his relationship with the controversial financier Jeffrey Epstein. The company’s board has backed Staley, who is facing his second probe by U.K. regulators since joining the bank in 2015.

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