Barclays PLC is forecast to see earnings fall by more than a third this year as the coronavirus crisis unfolds, just as CEO Jes Staley's determination to focus on its investment banking arm looked like paying off.

Virus-inspired interest rate cuts and lower market activity will take £1 billion off the British bank's income this year, said analysts at Jefferies, with about £500 million coming off investment banking revenue. The result would be a fall in expected 2020 earnings of 37%, with a sharp rise in impairments in the first half of this year. Nor would the pain end in 2020, said Jefferies, which also forecast a 14% downgrade in earnings in 2021.

Staley's commitment to the investment banking business has been a distinctive element in his tenure at the bank he joined in 2015.

Strong i-bank performance

The coronavirus crisis has hit at a time when Barclays' investment banking arm was performing strongly, with pretax profits up 14% in 2019 to £2.96 billion, while return on tangible equity at the investment bank was 8% in 2019, up from 7.1% in the previous year.

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In the most recent figures on investment bank revenues from financial markets analytics firm Dealogic, Barclays won top spot for European banks in U.S. rankings, moving from sixth to fifth place in the U.S. and to sixth from seventh place globally.

Before the full effect of the coronavirus crisis began to be felt, Jefferies said it believed demand for corporate lending had materially picked up, which could lead to balance sheet growth in the corporate and investment bank, with 7% loan growth.

Staley said at the bank's full-year results presentation that he was pleased with the investment bank's progress. Income from fixed income was up 17% to £3.36 billion, although equities were down 7.0% to £1.89 billion.

"Despite a 6% decline in industry wallet across markets and banking since 2017, we have grown income by 9% in that period," he said.

Advisory fees at the investment bank rose to £780 million in 2019 from £710 million in the previous year. However, overall banking fees decreased by 7% in the fourth quarter of 2019 as a result of lower advisory fee income compared with a record fourth quarter in the previous year.

The investment bank's markets business, which generated 24% of group revenue but consumed 58% of group risk-weighted assets in 2019, is also likely to have had a good first quarter, said Jefferies, though that comes with a 44% increase in market risk-weighted assets to £59 billion.

Activist investor

Barclays' U.S. investment banking arm was expanded amid the wreckage of the great financial crisis when the bank acquired the core Lehman Brothers business. Activist investor Edward Bramson took a stake in the bank in 2018, becoming its biggest shareholder, and has lobbied intensely for the bank to severely curtail its investment banking arm ever since. His argument is that the business ties up too much capital that could be better employed elsewhere or returned to shareholders.

Staley reacted to Bramson’s increasingly vicious assault by dismissing Tim Throsby as head of the investment bank in 2019 and taking direct control himself. Chairman Nigel Higgins, who joined in 2019, has backed Staley.

But Bramson has not gone away despite failing to win a seat on the board of the bank at last year's annual general meeting. He has ratcheted up the pressure on Staley after the bank announced that the Bank of England and the Financial Conduct Authority were investigating his links with the late convicted sex offender and financier Jeffrey Epstein. Staley denies any wrongdoing in his representation of his contact with Epstein to the board, which has offered him its full support.

Staley was previously investigated by financial regulators over his attempts to unmask a whistleblower at the bank and censured and fined for doing so.

Bramson called for Higgins to get rid of Staley when the regulators' probe was announced, a move which analyst John Cronin at stockbrokers Goodbody called a "cheap shot."

Canceled Dividend

Barclays, like its peers, has announced that it had "chosen" to cancel its 2019 dividend, though the regulator had to make it clear that it would act if the banks failed to comply. Barclays, which was due to pay out more than £1 billion on April 3, said it would decide on any future dividend policy and amounts at year-end 2020.

It had decided to pay 6 pence per share for the second half of 2019, making 9 pence for the full year. That would have been a 9.6% dividend yield but now that is reduced to 3.2%. However, the decision not to pay the dividend does boost Barclays' common equity Tier 1 ratio to 14.2%, putting it comfortably in excess of the bank's target of 13.5%.

Not paying the dividend was "regrettable," said analysts at Investec but there might be a silver lining for investors: it expects a £1 billion share buyback in 2022. Investec is forecasting a 10% year-on-year decline in revenues and a 106% increase in impairments, though it also forecasts a 2% year-on-year reduction in costs and an 85% decline in net negative exceptional items, mainly as a result of the end of the payment protection insurance scandal.

Overall, Investec forecasts a 65% fall in earnings per share to 5 pence per share in 2020.