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Barclays Traders Lead the Wall Street Pack

Barclays Traders Lead the Wall Street Pack

(Bloomberg Opinion) -- Barclays Plc’s traders are helping Chief Executive Officer Jes Staley just when he needs them most. Buttressed by a surge in revenue that dwarfed even its bigger Wall Street peers, Barclays was able to take a big charge for the inevitable buildup of bad loans during the worst economic contraction in living memory, and still post a decent profit. Staley’s bet on having a large investment bank at Barclays should keep investors onside for now.

Trading at the British bank was off the charts in the first quarter. Its fixed-income division raked in 1.9 billion pounds ($2.4 billion), twice what it earned in the same period last year, and about three times the average gain of its American competitors. In equities, revenue rose 21% to 564 million pounds, largely in line with rivals. And unlike the recent slowdown in trading activity that some competitors have been seeing, Barclays said its second quarter was already well ahead of the same period in 2019, a record-breaking period for the division.

There are some reasons for caution. The bank took a hit on leveraged loans of about 320 million pounds, offset partially by hedges. Staley said he was confident that the risk to the bank’s high-yield loan book has subsided, with U.S. junk bonds recovering after the Federal Reserve’s decision to buy in the market.

But just how many more risks have Barclays traders been taking than their rivals? Asked by an analyst about his company’s secret sauce, Staley said the performance wasn’t a reflection of taking a particular trading position on the markets and the Covid-19 pandemic's impact. Instead, he said it reflected a sharp increase in client activity during a period of extreme dislocation across asset classes. “Everyone here is committed to making sure that this bank is a firewall as we go through this economic crisis,” Staley said. 

With the wind in its sales from trading, Barclays does seem to be provisioning for bad loans more prudently than some of its European peers. The bank is taking 1.7 billion pounds of charges for the quarter, more than three times the amount set aside by Deutsche Bank AG. Most of the Barclays impairment reflects the deteriorating macroeconomic outlook, and it includes a provision for its oil loan book that assumes a 50% chance of crude prices remaining at $20 for the rest of the year.

Crucially, the bank’s forward guidance may provide the greater comfort to investors. Excluding oil and gas, Barclays has a further 26.4 billion pounds of lending exposure to other sectors that have been hurt in the pandemic crisis, from airlines to hospitality. This makes up about 4% of its credit-risk exposure. Assuming that global gross domestic product and unemployment data don’t worsen relative to the Barclays models, the bank said its quarterly impairments should run at between 800 million pounds and 1 billion pounds per quarter this year. That’s largely in line with analyst expectations, which estimate that Barclays will remain profitable in 2020.

Still, income is falling in the bank’s British unit and its U.S. consumer businesses, which make up the other half of Barclays’s profit and most of the impairment charges. Lower interest rates are eating into profit margins and customers are spending less.

Overall, Staley will be emboldened in his defense against an activist investor, Edward Bramson, who has tried to get Barclays to shrink its investment bank. He isn’t out of the woods yet, though. The CEO’s personal conduct is the subject of regulatory scrutiny for the second time since he took charge of the lender. And there’s still the chance of the coronavirus outbreak throwing up new surprises. As Staley said on Wednesday, this is beyond what we lived through in the financial crisis of 2008 “by some measure.”

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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