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Breakingviews

Breakingviews - Barclays’ JPMorgan impression may fall flat

Chief executive officer of Barclays, Jes Staley, takes part in the Yahoo Finance All Markets Summit in New York, U.S., February 8, 2017.

LONDON (Reuters Breakingviews) - Bank results are like optical illusions: Similar numbers can make a different impression depending on the viewer’s angle. That’s the case with Barclays and its Chief Executive Jes Staley’s erstwhile employer, JPMorgan. Both took aggressive charges for bad debt. But what looks like a sign of strength for the U.S. bank may emphasise existing worries about Barclays.

The 18 billion pound lender on Wednesday unveiled a mammoth 2.1 billion pound charge for possible loan losses, equivalent to roughly 2.2% of its gross lending on an annualised basis. That’s significantly higher than a broadly equivalent charge equal to 1.2% of loans announced by HSBC, on Tuesday, as well as Deutsche Bank’s 0.44% first-quarter loan-loss rate.

A big part of the gap comes down to the banks’ different businesses. About two-fifths of the bad-debt charge for Staley’s group came from its consumer, cards and payments unit, which houses the U.S. credit-card operations. Such unsecured lending is far more sensitive to an economic shock than, say, Deutsche Bank’s German mortgages, which make up 29% of its 459 billion euro loan book.

But Staley’s beancounters are arguably taking a more pessimistic approach than those at Deutsche Bank. Barclays’ credit forecasts are based on a 50% likelihood of oil staying around $20 throughout the year and sharp rise in U.S. unemployment to peak at 17% and average almost 13% in 2020. By contrast the German lender’s full-year forecast for credit losses is based on average GDP and unemployment rates over the next three years, factoring in some of the benefit of a potential recovery.

Deutsche Bank is availing itself of European regulators’ forbearance and looking through some of the pain. Barclays boss Staley, by contrast, has adopted an approach that resembles JPMorgan’s. The U.S. bank on April 14 said it expects a “fairly severe recession”, and took an $8.3 billion charge to absorb the resulting deterioration of loans and other assets.

The JPMorgan impression may fall flat. While the American bank’s move looked like a prudent way to bolster its balance sheet, Barclays’ may instead remind investors of its heavy exposure to investment banking and risky consumer credit, a racy business mix by European standards. The UK lender trades at a lowly 0.4 times forward tangible book value, compared with 0.6 on average for the top 25 Europe-listed banks. Staley’s hair shirt may fit a little too well.

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