The FTSE pared earlier gains, after disappointing revenues at Barclays investment banking division sparked a sell-off in the banking sector.
Barclays plunged 5.9% to 340p by late morning, after unveiling disappointing first-quarter revenues at its investment banking division Barclays Capital (BarCap). The UK’s third-largest bank by assets said revenue at its BarCap unit plunged 26% to £3.8 billion in the first quarter, confounding analysts who were anticipating quarterly revenues of £5 billion. Still, pre-tax profits at BarCap outstripped the performance of every other division, climbing 62% from the prior year to £1.47 billion – this accounted for over 80% of the group’s total profits!
‘In the next nine months, we would expect to see new businesses coming on stream,’ said Barclays Capital President Jerry Del Missier in a telephone interview, who pointed to cash equities and credit business.
Group pre-tax profits climbed 47% to £1.8 billion from revised £1.2 billion a year ago, excluding profits from Barclays Global Investors (BGI), matching the average forecast from four analysts polled by Reuters. The rise in the group’s bottom line was helped by a sharp drop in impairments, which were 35% lower than the same quarter a year ago and down 19% from the fourth quarter.
John Varley, the bank’s chief executive, said: ‘I am pleased with the strong growth in profits which we have delivered this quarter. Diversification of our business and risk, and good underlying performance, have combined to produce this result. The improvement that we have seen in impairment reflects the signs of economic recovery now evident in many of the markets in which we operate.’
Barclays results failed to impress, as its blue-chip peers begun to relinquish earlier gains. By around 10:40am (London time) HSBC and Royal Bank of Scotland both were both 0.9% lower at 55.7p and 672p respectively while Lloyds Banking Group had retreated 0.3% to 67.83p. Standard Chartered outperformed the sector, however, gaining 1% to 1780.5p.
Surprisingly, risky currencies were predominantly unscathed by a turn in banking sector sentiment, with the Aussie dollar, euro and sterling all maintaining gains against the US dollar by late morning. It seems as though the currency market is more focused on wide rmacroeconomic issues at this juncture, particularly Greece, which announced that it is preparing to implement severe austerity measures to secure a multi-billion euro aid package. This will help the crippled Mediterranean economy avoid a default.
I must point out that Spain’s unemployment rate soared above 20% for the first time in more than a decade in the first quarter from 18.8% in the prior three months. That was ahead of the 19.8% median forecast shown in a Bloomberg survey of estimates and may have left investors fearing that Spain may be the next country to request bailout funds from the EU – so watch out!
Miners also pared earlier gains, with sector losses ranging between 0.3% and 1.9% so far this morning. Drugmakers were also a drag on blue chip index this morning, with AstraZeneca, GlaxoSmithKline and Shire down between 0.3% and 0.6%. Energy majors were mixed meanwhile, with Tullow Oil declining 3.9% to 1136p after Deutsche Bank downgraded the company from ‘buy’ to ‘hold’ and lowered its price target from 1380p to 1295p on the back a shift in the company’s risk/reward balance. Deutsche Bank said they prefer Cairn Energy, which they rate as a ‘buy’.
Integrated energy giant BP was also in the red, 0.7% lower at 580p after announcing that it has lunched the next phase of its effort to contain and clean up the Gulf of Mexico. Bank of America Merrill Lynch believes that the market’s reaction to oil spill is overdone, however. They maintain a ‘buy’ rating on BP with a price target of 750p. That provides a potential upside of 29% from the current share price.
Bucking the negative trend was WPP, the world’s largest ad firm by sales, which climbed 2% to 706p this morning, after raising its like-for-like annual revenue growth forecasts, citing a strong turnaround in the United States.
TalkTalk Telecom also edged higher after Morgan Stanley upgraded the company to ‘overweight’ and upped its price target from 145p to 160p, saying it expects the integration of Tiscali to improve the company’s margin outlook. TalkTalk gained 0.25% to 127.3p.
By 10:45 (London time) the FTSE 100 Index was trading at 5592.49, representing a 25.35 (-0.45%) decline from its previous close. The FTSE 250 was flat, up 3.51 points (+0.03%) at 10396.47.
Looking ahead, the US first-quarter GDP figures are scheduled for release at 1:30pm (London time) followed by the Chicago PMI and the Reuters/Michigan consumer sentiment survey at 2:45pm and 2:55pm respectively. According to Bloomberg, the first-quarter GDP figure is expected to show the US economy expanding at an annualised pace of 3.3%.
