LONDON (Reuters) - British bank Barclays (BARC.L) is set to miss a key profit target after its investment bank ended 2011 with its worst quarter for three years.
A slump in bond trading income due to the euro zone debt crisis dragged down annual profit, prompting Chief Executive Bob Diamond to push back a return on equity (RoE) target of 13 percent he set less than a year ago.
“The idea of 13 percent is pie in the sky, and even getting to 10 percent is a long way away,” said Alex Potter, analyst at Berenberg Bank. Return on equity is a measure of profitability.
Rivals including Credit Suisse CSGN.VX, UBS UBSN.VX and Deutsche Bank (DBKGn.DE) have all struggled to maintain profitability in their investment banks during 2011, hit by volatile trading and tougher regulations.
Diamond did not abandon his RoE target, but said: “Thirteen percent remains absolutely the right target and its very achievable, but we may not achieve it in 2013 given the impact of the external environment.”
The bank’s return on equity of 5.8 percent last year, from 7.2 percent in 2010, was “unacceptable,” he said.
“They need to get harder in restructuring these banks,” Potter said, adding the bank is still not getting to grips with its high staff costs.
Barclays said it had cut bonuses at investment banking division Barclays Capital (BarCap) by 32 percent from the year before, and incentive awards across the group were down 26 percent.
BarCap’s bonus pool was 1.5 billion pounds, or an average of 64,000 pounds across its 24,000 staff. Across the group the average bonus was 15,200 pounds.
Barclays is the first of the big British banks to report results and has come under pressure to rein in pay for bankers, and for Diamond, after a bad year for the industry and as jobs continue to be cut and the economy wobbles.
Diamond, who became chief executive a year ago after a decade building up BarCap, has for years been one of Europe’s best paid bank executives and has faced calls to forgo his bonus.
He refused to comment on whether he would be awarded a bonus or what he planned to do.
Barclays, Britain’s fourth-biggest bank by market value, reported a pretax profit of 5.9 billion pounds for 2011, down 3 percent on the year and below analysts’ forecast of 6.1 billion, according to a company poll.
Barclays shares fell in early trading but bounced back and were up 3 percent at 240 pence, after hitting their highest level since July.
Dealers said a weak performance in investment banking had been expected and investors were encouraged by decent performance in retail banking and a one-third fall in bad loans to 3.8 billion pounds.
The bank also promised a final dividend of 3 pence, more than expected.
Income at BarCap fell to 1.8 billion pounds in the fourth quarter, down 19 percent on the previous three months and almost half of its level a year ago. Income for the year was 10.3 billion, down almost a quarter on 2010.
A slump in bond trading and advisory work hammered all banks late last year, and BarCap fared worse than some U.S. rivals but not as badly as Credit Suisse.
“The fourth quarter was certainly tough and all the second half was difficult, but we see that as an anomaly,” said Rich Ricci, co-head of BarCap. It has had an “encouraging” start to this year.
Ricci said he was still targeting annual BarCap income of 12-14 billion pounds and an RoE for the division of 15 percent. “We’re not backing away from that,” Ricci said.
BarCap’s fixed income, currency and commodities income in the fourth quarter fell 32 percent from the previous three months and its equities income fell 10 percent and advisory was up 30 percent.
The bank said it will cap its cash bonus for BarCap staff at 65,000 pounds this year.
Total staff costs fell 4 percent to 11.4 billion pounds from a year earlier, or an average of 73,800 per employee. The bank cut 6,400 jobs during the year.
“There remains an unacceptable disparity between the huge pay awards to the select few at the top of the organization and the majority of the workforce,” said David Fleming at Unite trade union.
Diamond said the bank will cut annual costs by 2 billion pounds under his revamp plan, which also includes shaking out underperforming areas and shrinking loans.
The economic and regulatory environment will “continue to be challenging” this year, he said.
($1 = 0.6312 British pounds)
Additional reporting by Sudip Kar-Gupta, Editing by Jane Merriman and Mark Potter