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Barclays Plc’s profit fell more than expected in the second quarter after it booked charges and penalties in the US, marring a strong period for the bank’s bond traders.

The British lender said a market plunge would increase the cost of buying back U.S. investment products it mistakenly oversold. Barclays also expects to pay $200 million in penalties to the US regulators to settle a long-running probe into unapproved messaging channels used by staff. 

Those costs forced the bank to raise its expense outlook for the year, and overshadowed a better-than-expected performance for some of its investment bank. Fixed-income, currency and commodities traders delivered a revenue rise of more than 70%, beating all other global banks, while dealmakers had the smallest drop in fees during a quiet few months.

The performance added up to “a messy quarter," according to RBC Europe analyst Benjamin Toms, with “unhelpful" litigation and conduct costs weighing down income growth. 

Shares were trading 3% lower at 11:20 a.m. in London. 

Profit before tax at group level fell about 40% to £1.5 billion, against a consensus of £1.76 billion. The corporate and investment bank’s profit almost halved to £784 million. 

Barclays revealed in March that it had sold billions more in structured and exchange-traded notes than it had registered for sale with US authorities. It’s now required to buy them back at the original price, taking a hit on any market movements. 

The bank said on Thursday it had taken £984 million in charges to reflect “significant market moves" in the three months through June, when the S&P 500 index fell almost 16%. Thanks to hedging arrangements, Barclays said it’s managed to offset £758 million of this. Barclays also took a provision of £165 million to cover a potential fine from the Securities and Exchange Commission, which is in “advanced talks" with the bank to settle the matter, Finance Director Anna Cross told journalists.

Costs for this year are now expected to total £16.7 billion, up from Barclays’ previous outlook of £15 billion. 

The bank also said income from capital markets and merger advisory fell 36% from a record quarter last year, faring slightly better than rivals in Europe and US whose deal rosters have dwindled during months of heightened volatility in global markets. New Chief Executive Officer C.S. Venkatakrishnan has stuck to predecessor Jes Staley’s strategy of maintaining a large investment bank as a balance to the retail business. 

On Wednesday, Deutsche Bank AG lowered the outlook for its investment bank despite beating forecasts in its trading arm, while Credit Suisse Group AG said it’s scaling back its investment bank in the face of mounting losses. JPMorgan Chase & Co. and Morgan Stanley both fell short of analysts’ estimates, partly due to the slump in dealmaking.

Away from the tumult in the investment bank, Barclays said its retail business was performing well through increased cost of living pressures. “Customers have reacted rationally to the economic environment," continuing to pay down their debts and looking to remortgage while rates are low, Cross said.

What Bloomberg Intelligence Says

Barclays’ £1.7 billion (11%) increased cost guidance for 2022 shouldn’t cause concern as it’s within expected ranges, and offset by underlying revenue growth 8% ahead of costs at 2Q, FICC trading 33% better and a new £500 million buyback are all positive surprises. 75% of the cost hike is due to the US overissuance debacle, now drawing to a close, and the remainder mostly the strong dollar.

-- Jonathan Tyce, BI banking analyst

Barclays expects impairment charges to “remain below pre-pandemic levels in coming quarters given reduced unsecured lending balances and existing coverage ratios," after book an additional £200 million in the quarter.

Barclays also said it will carry out a further share buyback of £500 million. 

This story has been published from a wire agency feed without modifications to the text.

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