Opening Quote: Barclays’ piece of investment banking action

Don’t ask Barclays boss Jes Staley for help with a jigsaw.

At the bank’s annual meeting in May, he said “the huge task of restructuring Barclays is now complete” — meaning the non-core unit has been closed, the Barclays Africa stake sold down, the UK ringfenced bank set up, a new group service company created, and the common equity tier one capital ratio rebuilt to 13 per cent.

But there would appear to be a few other pieces left: the cost of remaining regulatory settlements, the task of getting the investment bank up to speed with US rivals, the need to deal with activist shareholder Edward Bramson, and the risk of bad debt impairments — not to mention the small matter of possible Serious Fraud Office charges. 

This morning’s half-year results suggest Mr Staley is picking up these pieces, too. 

Litigation and conduct charges of £2bn were taken, which mainly reflected a £1.4bn settlement with the US Department of Justice over the sales of residential mortgage-backed securities, plus another £400m for mis-selling payment protection insurance in the UK — down from £700m in the same period last year. 

Corporate and investment bank pre-tax profit was up 17 per cent to £2bn, driven by a 30 per cent rise in equity trading income, offset by a drop in fixed income and currency trading, banking fees and corporate lending. Costs were also cut in the division, enabling a 5 per cent reduction in operating expenses for the bank overall. 

An analyst at Hargreaves Lansdown had warned that “if Barclays fails to get a slice of what’s been a bumper investment banking season on Wall Street then questions will be raised about the strategy”.

While it is not yet clear exactly what Mr Bramson wants, he is expected to focus on the return of capital to shareholders, possibly by calling for the shrinkage of Barclays’ investment banking division to free up the bulk of the £25bn of capital tied up in it. 

Credit card and lending businesses suffered, though, with pre-tax profit down 22 per cent, as total income fell and operating expenses rose. Credit impairment charges and other provisions fell by 40 per cent, however, to £343m. 

As a result, Barclays group profit before tax was down 29 per cent in the half year to £1.7bn — but principally due to those higher litigation and conduct charges and operating costs. In the UK, pre-tax profit was up by nearly a third. 

Barclays also maintained a CET1 capital ratio of 13 per cent, against a forecast of 12.8 per cent. 

UBS analysts had warned “there are questions around the strength of incoming credit quality and the outlook for impairments”, and the outlook statement reflected that. Barclays said income in the second half will be influenced in part by conditions across investment banking markets, where volatility has been low in July. It also currently expects impairment for H218 to be higher than for H118.

Mr Staley’s jigsaw is perhaps not yet complete. 

Government contractor Serco has been picking up some of the pieces from rival Carillion’s collapse. It took on a number of Carillion’s former contracts, including facilities management services at NHS hospitals, which could increase revenue by around £70m per year. 

But it has also been experiencing challenging market conditions. In an update ahead of today’s half-year results, it said revenue was expected to fall by around 11 per cent for the six months compared to the same period last year, hurt by “adverse currency impacts” and by contracts that ended in 2017. But it reckoned underlying trading profit would to rise by 20 per cent to £80m, driven by cost savings. 

And chief executive Rupert Soames has confirmed as much this morning. He said revenue was slightly better than forecast, down 5.6 per cent at constant currency due to contract attrition, or 9.4 per cent at reported currency. It came in at £1.36bn against forecast of £1.35bn (vs £1.51bn for 1H 17).

So, as set out in his five-year strategy, profitability is starting to improve — with underlying trading profit having increased by 20 per cent at constant currency in the first half to £37.6m, within the forecast range of £35-40m and up on last year’s £34m. 

Serco also noted that it had seen a continuation of the strong order intake achieved in 2017, with contract awards so far in 2018 of some £1.6bn, four-fifths of which was from non-UK government customers.

Insurer Aviva insisted its pieces are falling in to place, despite a fall in first-half profits. 

This morning it has reported operating profits of £1.44bn, down 2 per cent on last year — mainly because of disposals, tough market conditions in Canada and higher weather related insurance claims.

Shareholders are likely to look at two big pieces, however: the dividend was increased by 10 per cent to 9.25p per share, and Aviva said it had started a £600m share buyback programme in the first half, having paid back €500m of expensive debt. 

And finally the vital piece of estate agent Countrywide’s picture — emergency debt reduction — might be coming together at last. It has announced a £140m fundraising to avoid potential insolvency. 

This morning Countrywide said it had fully underwritten a placing and open offer, with private equity group Oaktree — its largest shareholder — agreeing to buy £24m of shares. 

But this is make or break: the company’s auditors, PwC, warned there is a “material uncertainty” as to the future of the business since any failure of the share issue could result in Countrywide’s banks withdrawing its credit facilities.

Today’s Lombard column focuses on outsourcer Capita and its repeated profit guidance:

BBC “Audience Services” is a euphemism. It is basically the TV complaints department. Years ago, the worst it had to deal with was a chaotic broadcast of the Brit Awards. Lombard knows this having spent five hours (in a former career) logging phone calls about sweary pop stars. Nowadays, though, it has to field criticisms of BBC News coverage of Brexit. And Lombard cannot think why outsourcer Capita (or anyone else) would want to do that job for five minutes, let alone five years. 

In fact, all of the contract wins listed in Capita’s interim results on Wednesday seemed a tad challenging,,,

Read the rest of today’s Lombard column here. 

FT Opening Quote, with commentary by Matthew Vincent, is your early Square Mile briefing. You can receive it by email at 8am every morning by signing up here.