Optical Illusions

Image source: Olena Yakobchuk - Shutterstock

What's going on?

Barclays reported a better-than-expected quarterly profit on Friday, but investors saw something very different when they squinted more closely at the British investment bank’s results.

What does this mean?

It’s true, Barclays’ profit came in 30% higher than expected, and its stock trading segment’s revenue grew twice as fast as those of its rivals last quarter. But that’s not quite the whole story. See, the revenue it makes from two of its major businesses – advising companies on raising money and enabling investors to trade bonds, currencies, and commodities – only grew about half as fast as other banks. And given that French bank BNP Paribas also saw revenue from its bond, currency, and commodity trading business drop off, investors seemed to take it as a sign that both banks were losing market share – and they sent both companies’ shares down.

Why should I care?

For markets: Investors made a rod for banks’ backs.

Neither BNP Paribas nor Barclays’ results were bad exactly, but investors had been hoping for something outstanding. After all, European banks HSBC, Santander, and Deutsche Bank all reported strong earnings last week, with the latter even posting its best quarter since 2014. That preemptively lifted investors’ expectations, and the region’s banking stocks along with them.

The bigger picture: Activist investors may have had a point.

The drawback of a riskier investment banking segment like trading is that a favorable environment can vanish as quickly as it appeared, just like it did for Barclays. That’s partly why a prominent activist investor was pushing for the bank to focus on the reliable – if unexciting – business of savings and loans. And now that rising bond yields are driving up that business’s profitability, the activist in question may feel vindicated…

Originally posted as part of the Finimize daily email.

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