By Steve Slater and Matt Scuffham
LONDON (Reuters) - Barclays Plc (L:BARC) said its underlying profits fell 8 percent in the second quarter as the British bank's attempts to crack down on high-risk trading and subdued market activity took a toll on investment banking revenue.
Barclays said it had made good progress in cutting costs and hiving off assets it no longer wants. It has cut 5,000 jobs this year, leaving it with fewer staff than at any time since 2007.
Its shares were up 3.2 percent at 226.2 pence by 0745 GMT (3:45 a.m. EDT), the top performing European bank stock. Some analysts said the drop in investment banking revenue was less severe than they expected.
Chief Executive Antony Jenkins has pledged to make Barclays leaner and more profitable and stamp out wrongdoing, but his turnaround efforts are being dogged by problems from the past and the weak investment bank revenues.
Barclays said the U.S. Department of Justice had requested an extension to a non-prosecution agreement (NPA) that was due to expire last month, to allow it to continue to investigate possible misconduct in foreign exchange trading. The NPA was put in place after the bank was fined $450 million for the alleged rigging of Libor interest rates, and means if the DOJ finds any wrongdoing in FX activities it could come down harder on the bank.
The bank also set aside a further 900 million pounds to compensate customers mis-sold loan insurance, taking its total bill for the scandal to 4.85 billion.
Barclays said adjusted profits in the three months to the end of June fell to 1.7 billion pounds ($2.9 billion) from 1.8 billion a year ago. First-half earnings were 3.3 billion, down 7 percent on the year but above the average forecast of 3 billion from analysts polled by the company, as operating costs fell.
Analysts said the bank had beaten expectations on its cost cutting and on losses from bad debts, and reported a stronger-than-expected leverage ratio of 3.4 percent, up from 3 percent at the start of the year.
Citi analyst Andrew Coombs said he expected to see "low single-digit" earnings upgrades following the results.
"We expect recent negative earnings momentum to reverse in the second half, which could allow the shares to grind higher, despite ongoing litigation concerns," he said.
FIXED-INCOME DECLINE
Barclays, which last year raised 5.8 billion pounds to bolster its capital and meet tougher regulatory demands, said its core tier-one capital ratio had risen to 9.9 percent at the end of June compared with 9.1 percent at the end of 2013.
The bank's shares are down about 20 percent this year, the third worst performer among Europe's top 47 banks <.SX7P>, which are on average up 1 percent. Barclays shares trade at 0.6 times book value, well below the average of 1 times for its European peers, according to Reuters data.
Its valuation is being depressed by the threat of more litigation costs, weak returns and its still hefty reliance on the investment bank, which is seen as more volatile than retail and corporate banking.
Revenues fell 16 percent at the investment bank, where business has been hit by a decline in fixed-income trading and tougher regulation.
Revenue from credit and macro products in the second quarter was down 17 percent, a steeper drop than at U.S. rivals which saw a fall of 9 percent on average.
That was due partly due to a strong British pound, and analysts said the investment bank's overall performance was in line with expectations, or slightly better. Advisory revenues jumped 35 percent, outperforming Barclays' competitors.
Jenkins is cutting 7,000 jobs in the investment bank as part of 19,000 job cuts across Barclays in the next three years.
"We are delivering the strategy that we set. We're ahead of all the targets that we set and as that establishes itself over the next few quarters, the market will reflect that in the share price," Jenkins said.
(Reporting by Steve Slater; editing by Matt Schuffham and Tom Pfeiffer)