Barclays has become the second big bank to breeze past profit forecasts this week after an increase in borrowing costs and bond trading during the UK’s market meltdown pushed earnings to £2bn this quarter.
The results, which follow a higher-than-expected windfall at HSBC on Tuesday, will further add to calls for the government to tax banks’ excess earnings, as lenders reap the benefits of higher interest rates and volatility across UK markets.
Barclays, which had been expected to reveal a slight dip in earnings, revealed that pre-tax profits rose 6% in the three months to the end of September, about £200m higher than the £1.8bn that analysts had forecast. That compares with £1.9bn during the same period last year.
The bank was aided by a rise in borrowing costs, which helped boost net interest income by almost 60% to £3bn, as the gap widened between what the bank pays out in interest on deposits, and what it charges customers on loans and mortgages. That figure, which also includes income from hedging products outside traditional loans, was up from £1.9bn a year earlier.
The Bank of England has raised interest rates from all-time lows of 0.1% last year to 2.25%, to help tackle inflation, which soared to 10.1% in September. The move, along with recent market volatility, has caused banks to increase the amount of interest they charge on loans to customers.
It came as Barclays’ investment banking division almost doubled its income from bond trading to £1.5bn, after an increase in buying and selling during the market meltdown that followed the UK government’s mini-budget last month.
The Liberal Democrat party is now calling on the chancellor, Jeremy Hunt, to raise taxes for the sector to plug a £40bn hole in public finances.
While the UK’s banking lobby group has railed against higher taxes, the Barclays chief executive, CS Venkatakrishnan, refused to be drawn on the issue, telling journalists: “Taxation is the purview of the government and we will see what they decide.”
He also ruled out moving Barclays’ headquarters abroad to avoid higher levies. “Absolutely no. We have been a proud UK bank for 330 years and long may that continue.”
Higher income at Barclays helped offset the £381m put aside to deal with potential defaults, as it prepared itself for the fact that some customers hit by the cost of living crisis could struggle to pay their – in some cases more costly – debts.
The bank said it had already observed a drop in spending on nonessential items such as clothing in September, as households adjusted to higher bills, including for energy and gas.
Its provision for potential defaults was higher than the £330m expected by analysts, and is more than three times the £120m it put aside for bad loans last autumn.
However, Barclays said that the number of people falling behind on debts “remained below historical levels”, explaining that the increased provision was the result of a “deteriorating macroeconomic forecast”.
Venkatakrishnan said: “Although we feel we are carefully positioned, we remain alert to signs of stress.” He added that the bank was planning to hire 1,000 employees in the coming weeks, effectively doubling the number of staff dedicated to helping struggling customers.
“While I’m pleased with the results, I’m very conscious that we live in unusually uncertain times,” the chief executive said. “This drives our conservative approach to managing our balance sheet and provision levels and our careful stance towards the expected deterioration in the global economy.”
Its rival Santander UK also reported an 11% rise in net interest in the nine months to the end of September to £3.3bn. It helped offset the £256m it put aside to protect against potential defaults, and contributed to a 4% rise in pre-tax profits to £1.5bn. The bank said the provisions were based on a poor outlook for the UK economy, where it expected lower house prices, as well as higher interest rates and inflation that could squeeze borrowers’ finances.
Meanwhile, Deutsche Bank also benefited from rising interest rates and the increase in trading. The German lender reported its highest third-quarter profits since the financial crisis, at €1.6bn (£1.3bn).