Bloomberg News

Barclays, RBS May Report Decline in Investment-Banking Revenue

October 28, 2011

Oct. 28 (Bloomberg) -- Barclays Plc and Royal Bank of Scotland Group Plc may post declines in investment banking revenue, mirroring falls at their U.S. counterparts, as the debt crisis eroded profit from trading stocks and bonds.

Third-quarter investment-banking revenue, excluding accounting gains from so-called debt valuation adjustments, may slip by about 20 percent from the year-earlier period to 2.25 billion pounds ($3.6 billion) at Barclays, and by 38 percent to 956 million pounds at RBS, according to the median estimate of three analysts surveyed by Bloomberg News.

Both companies “are going to say the same as the other investment banks, which is that it’s a very difficult environment and the outlook is cautious,” said Edward Firth, a banking analyst at Macquarie Group Ltd. in London.

During the third quarter, Europe’s sovereign-debt crisis worsened, Standard & Poor’s downgraded the U.S. debt rating, the Congress had a protracted debate over raising the U.S. borrowing limit and the Federal Reserve said it would hold interest rates near zero until 2013. Barclays, based in London, is scheduled to publish its earnings on Oct. 31 at 7 a.m. local time. Edinburgh- based RBS reports on Nov. 4.

JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment-banking revenue plunged 41 percent from the second quarter.

Deutsche Bank AG’s investment bank reported third-quarter pretax profit of 70 million euros ($99 billion), down from 1.1 billion euros a year earlier. MF Global Holdings Ltd., a U.S.- based futures broker, reported its largest-ever quarterly loss this week after stepping up trading earlier in the year.

U.S. Rivals

“The focus is going to be how they performed in fixed income, commodities and currencies and equity markets relative to the U.S. and continental names,” said Matthew Czepliewicz, an analyst at Collins Stewart Hawkpoint Plc in London.

Barclays’ results may mimic the Wall Street banks rather than Deutsche Bank due to its purchase of Lehman Brothers Holdings Inc. U.S. operations, Czepliewicz said. American banks have suffered less from the sovereign-debt crisis than their European counterparts.

Barclays derives 42 percent of revenue from investment banking. The equivalent figure is 33 percent for RBS.

Vickers Report, Capital

Among other divisions that will post figures, British retail banking generates 14 percent of Barclays’ revenue and 17 percent for RBS. The Independent Commission on Banking, chaired by John Vickers, has recommended those divisions be insulated with so-called ring-fences, a move that may cost the industry as much as 7 billion pounds. The proposal has drawn criticism from RBS Chief Executive Officer Stephen Hester.

Both companies may give more information about their capital ratios as regulators and politicians struggle to stem the crisis. European leaders agreed early yesterday on a plan to recapitalize European banks, boosted the firepower of a rescue fund to 1 trillion euros and persuaded bondholders to accept a 50 percent loss on holdings of Greek government debt. Details of how banks raise and measure capital are still to be decided.

Both banks have been cutting jobs to cope with the slowdown. Barclays said on Aug. 2 that it would eliminate about 3,000 jobs this year. Edinburgh-based RBS said on Aug. 5 it will cut about 2,000 jobs as writedowns on Greek debt and costs for compensating insurance clients pushed it into a first-half loss.

Pretax Profit

A dip in investment-bank earnings for RBS and Barclays “is inevitable,” said Andrew Lim, an analyst at Espirito Santo Investment Bank in London. “It’s mainly due to higher volatility and risk aversion due to the sovereign-debt crisis. That’s the root cause.”

Barclays may say pretax profit before debt valuation adjustments fell to 1.11 billion pounds from 1.27 billion pounds a year earlier, according to the median estimate of seven analysts surveyed by Bloomberg. RBS’s profit before tax and exceptional items may fall to 271.5 million pounds from 726 million pounds, according to the median estimate of four analysts surveyed by Bloomberg.

“Expectations are quite low,” said Bruce Packard, a banking analyst at Seymour Pierce in London. “We know July and August are normally quiet. We just haven’t had the September pickup.”

Debt valuation adjustments relate to accounting rules requiring banks to book losses when the value of their debt rises and gains when it declines on the theory that a loss, or profit, would be realized if the bank were to repurchase the debt. A gain is known as a credit valuation adjustment.

Barclays shares are down 19 percent this year, while RBS has tumbled 30 percent. The 46-member Bloomberg Europe Banks and Financial-Services index has declined 23 percent.

--Editors: Keith Campbell, Jon Menon.

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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