The week ahead: Barclays and RBS will show banks are still not sitting pretty

THE quarterly results from Barclays and Royal Bank of Scotland will this week underline the downturn in the performance of the banking sector, while economic growth figures will provide fresh insight into the health of the UK recovery.

Increasing global recession fears have hit the banking sector hard, with Barclays and RBS shares both losing around 40 per cent of their value between July and September.

The City will be looking for guidance on how both banks plan to accommodate the recommendations of the Independent Commission on Banking, which include ring-fencing banks’ high street divisions to protect them from riskier investment arms. Banks have already blamed new rules such as capital ratios for making it harder for them to generate the high returns investors once took for granted.

Taxpayer-backed RBS is expected to post pre-tax profits of £466 million in the third quarter on Friday, up from a loss of £657m the previous three months, which was triggered by the bank’s payment protection insurance (PPI) compensation bill.

But revenues at its investment arm Global Banking & Markets are forecast to have all but halved quarter-on-quarter to about £785m. It has been reported that falling investment revenues mean around 75 per cent sales are being swallowed up on staff costs.

Barclays is today expected to show revenues at its investment arm Barclays Capital, which usually contributes more than half the group’s profit, fell to £2.2 billion from £2.8bn in the previous quarter. However, an improvement in its retail and business banking division and its credit card arm Barclaycard is expected as the previous quarter’s hefty PPI hit drops out of the numbers.

Ian Gordon, analyst at Evolution Securities, said: “The third quarter will not be pretty, although we expect BarCap to yet again outperform peers in a weak quarter, and the group should still remain solidly profitable.”

Clothing chain Next will be among a clutch of retailers reporting this week. The firm, which operates 520 stores, has outperformed competitors despite not resorting to discounting, and has also increased profits through cost-cutting measures to help it offset the soaring price of commodities such as cotton.

But there are now fears that some of the shine could come off Next in its third quarter update because the warm September weather is expected to have hit sales of its autumn and winter ranges.

Charlie Muir-Sands, an analyst at Deutsche Bank, thinks like-for-like sales will be down 6.5 per cent in the three months to October.

He believes there is a real risk of retailers ramping up the levels of discounts in the run-up to Christmas, although he still expects Next’s final quarter sales to increase.

Ailing retailer JJB Sports and online fashion company Asos will also update the market this week.

Meanwhile official figures out tomorrow are expected to reveal that the pace of the recovery accelerated slightly in the third quarter of 2011 – but economists have warned the UK remains in the sick bay.

The Office for National Statistics is forecast to show gross domestic product up by 0.3 per cent between July and September, an improvement on the previous quarter’s 0.1 per cent but still below levels budgeted for by the Treasury.