RBS and Barclays to report plunge in investment revenue

INVESTMENT banking revenues at Royal Bank of Scotland and Barclays have taken a significant dive during the third quarter, results this week are expected to show.

Keith Bowman, banking specialist at broker Hargreaves Lansdown, believes figures from the two banks’ investment banking divisions could be down by as much as 20-30 per cent as the market continues to feel the pinch from reduced corporate activity.

“Investment banking conditions, as the US banks have shown us, have been quite subdued and I would not be surprised to see 20 to 30 per cent falls in revenues in those divisions at Barclays and RBS,” he said.

“There has been a relative lack of activity in equities and commodities. Fixed interest, in particular, has been a tough area and that will hurt RBS.”

Barclays kicks off the third quarter bank reporting season tomorrow, with RBS on Friday, followed by Lloyds and HSBC next week.

“It is so very easy to have a pop at Barclays given its overdependence on Barclays Capital [the investment bank] and its sub‑scale, loss-making European businesses for which there is no silver bullet,” said Ian Gordon, banking analyst at Evolution Securities.

The consensus forecast for top-line revenues at Barclays Capital in the quarter to the end of September is £2.2 billion, down from £2.8bn in the same quarter of 2010.

Shore Capital forecasts an underlying pre-tax profit of £1.2bn for the whole of Barclays, slightly down from the £1.3bn during the same period last year.

On RBS, the broker says: “Like Barclays, we expect RBS investment banking revenue and profit to come under pressure.”

Shore Capital expects RBS’s investment bank to have seen revenue fall to £1.2bn from £1.6bn in the same quarter of last year.

“You’ve got to remember that a lot of the merger and acquisition activity for investment banks has also dried up in the difficult stock market conditions. Fixed income volumes have also fallen off a cliff,” one analyst said.

Despite the headwinds in investment banking, bad debts at RBS are expected to have continued falling to about £1.9bn from £2.3bn.

Next week Lloyds, which has by the far the smallest investment banking arm of the big four banks, is expected to say economic conditions in Europe and the UK remain challenging. Its pre-tax profits are expected to tread water at about £900m.

HSBC will also be held back by the weak backdrop in investment banking, analysts say. They believe the bank will be quizzed on its progress on cost reduction – an area stated as a priority by chief executive Stuart Gulliver.