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Weak investment banking revenues could weigh on Barclays recovery story

Earlier this year Barclays reported that its full year profits trebled to £3.2bn, while at the end of its first quarter it saw its profits more than double to £1.7bn from the same period a year earlier.

The appointment of CEO Jes Staley to turn around the bank in December 2015 hasn’t been without controversy after he was heavily censured and is still being investigated for trying to unmask the identity of a whistle-blower earlier this year.

The restructuring process has seen the disposal of its Africa business and the loss of 13,600 jobs, while in March last year it was announced that the bank would be split into two divisions, UK and International as it looks to restructure its operations in order to operate in a rapidly changing global banking environment.

One of the more notable takeaways from the recent US bank trading updates was how investment banking profits had improved in the aftermath of the election of Donald Trump as US President last November. 

This reflation premium certainly helped Barclays at the end of last year and in the first quarter of this year, however this premium has disappeared in the last three months, so much so we saw that Goldman Sachs saw a 40% decline in its FICC division revenues, as turnover declined and the yield curve flattened. With M&A activity also muted it seems likely that there we could see revenue undershoot here as well.

As far as Barclays is concerned it is quite likely that we’ll see a similar effect play out, which means its UK business will need to take up the slack, and while the UK economy appears to be having a better Q2 than Q1, concerns about rising consumer debt are starting to rise.

Against this more positive backdrop challenges still remain, with the bank still facing hefty fines and penalties, in both the UK and US, from a variety of different regulatory bodies.

The bank has still not settled with the US Department of Justice with respective to mortgage backed securities mis-selling, while here in the UK the recent decision by the Serious Fraud Office to indict the bank and some of its former senior management about its 2008 Qatar capital raising could see the bank incur further costs.

It does seem strange in this regard that having seen a lot of its peers settle with various regulators, and slowly reducing them, that Barclays is taking a more aggressive attitude and pushing back, with the result it is seeing these legacy issues pile up, thus prolonging any uncertainty, and acting as a significant distraction to what management should be doing, and running the business.

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