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Barclays counts cost of PPI and warns outlook 'more challenging'

A surge in late claims for mis-sold PPI dented an otherwise good quarter for Barclays (BARC.L), the bank said on Friday, but the bank’s CEO warned conditions were “unquestionably more challenging.”

Barclays beat analyst forecasts on an underlying basis with its third quarter results released on Friday. But it slipped to a loss attributable to shareholders when litigation and conduct charges were included.

The bank warned in September that it would have to set aside up to £1.9bn to cover an unexpected spike in claims over the mis-sold payment protection insurance (PPI) scandal around the August deadline. Barclays said it eventually took a £1.4bn charge in the quarter.

Pre-tax profit slipped to £246m as a result and the bank reported a loss attributable to shareholders of £292m. Return on tangible equity, a key measure of bank profitability, slipped to negative 2.4% from positive 9.4% a year earlier.

When the impact of PPI and other litigation and conduct costs was stripped out, Barclays beat analyst expectations. Underlying pre-tax profit in the quarter was £1.8bn, compared to forecasts of £1.5bn and a second quarter figure of £1.5bn. Underlying return on tangible equity was 10.2% in the quarter.

Total income was £5.5bn, up 8% on a year prior, which also beat forecasts. Analysts had penciled in income of £5.3bn.

READ MORE: PPI claims surge and market ructions push RBS to a loss

Shares rose 2.5% in early trading in London.

Chief executive Jes Staley said the performance so far this year was “consistent and resilient” and showed “the benefits of our diversified model — one which allows us to weather today’s macro headwinds, and grow our businesses and profitability over time.”

Earlier this year Staley had to fend of activist investor Edward Bramson, who called for Barclays to slim down its investment banking activities and focus on its core retail market.

LONDON, UNITED KINGDOM - 2019/09/22: Barclays Bank logo seen in London. (Photo by Dinendra Haria/SOPA Images/LightRocket via Getty Images)
Barclays Bank logo seen in London. Photo: Dinendra Haria/SOPA Images/LightRocket via Getty Images

“These results show we remain on track to achieve our target of a group return of greater than 9% for 2019,” Staley said. “We continue to target an return on tangible equity of greater than 10% in 2020, though we acknowledge that the outlook for next year is unquestionably more challenging now than it appeared a year ago, in particular given the uncertainty around the UK economy and the interest rate environment.”

The bank said it “has become more challenging to achieve these targets [for return on tangible equity], particularly with respect to 2020.”

READ MORE: Millennials and Generation Z embrace multi-banking

Staley’s warning on interest rates comes a day after rival Royal Bank of Scotland said a “deterioration in economic sentiment for the global economy” hits its investment banking and trading unit, specifically calling out falling bond yields.

A record number of bonds have fallen to negative yield globally, meaning investors are guaranteed a loss, amid fears about the world economy. This squeezes margins for banks.

Perhaps worryingly, Barclays’ credit impairments rose to £1.4bn so far this year, up from £800m this time a year ago.

AJ Bell’s investment director Russ Mould had said ahead of the results that this number would be closely watched as “rising bad loan impairments could be a sign that the global economy is rolling over as borrowers struggle to fund their debts.”

“The prior year benefitted from favourable US macroeconomic scenario updates and single name recoveries, whilst Q319 impairment reflects a c.£60m net charge from revised scenarios, impacting primarily the Group’s UK and US cards portfolios,” Barclays said. The bank also reported a fall in UK impairments and said the strengthening dollar also impacted its provisions for lending losses.

Jefferies analysts Joseph Dickerson and Aqil Taiyeb called it a “solid” quarter that “should support share price momentum” but said: “Investors are likely to scrutinize a worse than expected outcome in card impairments.”