London — Barclays has said it expects a prolonged stretch of economic contraction and bad loans, overshadowing the success of its traders in the coronavirus pandemic.

US and UK unemployment, a key variable for souring credit, “is now expected to be heightened for a prolonged period”, the London-based bank said on Wednesday as it reported second-quarter earnings.

It took a £1.6bn charge to anticipate bad loans, which brought the total to £3.7bn so far for 2020, more than analysts anticipated. The gloomy outlook illustrates the limits of CEO Jes Staley’s bet on investment banking and trading in an environment where the British economy faces its worst downturn in three centuries.

“There has been extraordinary economic contraction,” especially in the US and UK, the bank’s two principal markets, Staley said on Bloomberg Television.

Worsening outlook

The firm downgraded its forecasts for the UK and the US economies and consequently had to bolster its provisions. It now assumes UK unemployment might surge to 6.5% next year, up from a 4.5% assumption when it reported first-quarter figures.

If British unemployment reaches 7%, Deutsche Bank analysts have estimated the nation’s banks might book up to £40bn in provisions over two years.

Barclays’ securities division defied the gloom, reporting a 60% gain in forex, rates and credit income, though some analysts expected bigger gains after Wall Street’s blockbuster quarter. Staley, too, warned that growth at the securities unit is set to slow.

Volatility in the first two quarters was exceptional this year, according to the CEO. “People are expecting a normalisation.” 

The stock fell 4% in London trading.

Barclays, the first British bank to report quarterly earnings, has slumped about 40% in 2020. That’s still a better performance than NatWest Group and Lloyds Banking Group, domestically focused peers without substantial securities businesses.

“These results aren’t exactly unexpected, but they paint a pretty bleak picture of the UK economy,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown.

Barclays expects that impairments in the second half will fall from the first-half level. It also took a £186m impairment related to a single client that it didn’t identify.

The credit card and payments unit booked a loss for the first six months of 2020. The bank has said it expects the income at this business to recover, but headwinds, including low interest rates, are likely to persist into 2021. The division recently stopped taking new applicants for a co-branded credit card with Uber Technologies, one of its highest-profile cards in the US market.

Barclays had previously indicated that quarterly impairments should run between £800m and £1bn per quarter in 2020. Analysts expect a £1.4bn hit in the second quarter.

The bank said there are “early signs of credit deterioration” in UK unsecured lending, a business whose growth Barclays has slowed down as the pandemic crisis gathered pace.

Other key figures:

  • Second-quarter net income fell 4% from a year earlier, in line with estimates.

  • Pre-tax profit fell 77%, worse than the 69% consensus analyst estimate.

  • Equities income jumped 35%, beating the 3% consensus estimate.

Two of Barclays’ European peers reported figures on Wednesday that also showed the diverging fortunes of trading businesses and domestic economies.

Spain’s Banco Santander took a $14.8bn hit related to Covid-19’s effect on the economic outlook. In Germany, Deutsche Bank reported its biggest fixed-income trading gain in almost eight years.

Staley repeated that Barclays would wait until the end of the year to consider the future of its dividend and to make a decision on variable compensation after the stellar trading performance. He said that Barclays wants to “pay fairly, but also be mindful” of the pandemic.


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