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Europe Markets: Barclays drags down U.K. bank stocks after warning on net interest margins

Barclays led U.K. banking stocks lower on Tuesday, after the London-listed lender posted a sharp fall in third-quarter profits and warned that a strategic review would lead to large cost cuts.

A weak performance by the investment banking division, relative to Wall Street peers, and narrowing profit margins at the U.K. consumer-focused operations saw group net profit decline 16% to £1.3 billion ($1.6 billion).

C. S. Venkatakrishnan, Barclays chief executive, said he would deliver an update alongside full year results in February that would set out capital allocation priorities and revised financial targets. “We see further opportunities to enhance returns for shareholders through cost efficiencies and disciplined capital allocation across the Group,” he said.

Barclays BARC, -6.55% shares lost more than 5% as investors were particularly concerned by news that net interest margins — the difference between the rate paid to customers for their deposits and the interest received on loans — were forecast to be in a range of 3.05% to 3.10% this year, down from the previous 3.15% to 3.2%.

“Net interest margin is the metric the banks are judged on so it is not a surprise to see Barclays heavily punished for downgrading guidance here even if profit for the third quarter was ahead of guidance,” said Danni Hewson, AJ Bell head of financial analysis.

Indeed, the evidence of competitive pressures on NIM impacted other U.K. banks, with shares of NatWest NWG, -2.04% down more than 2% and Lloyds Banking LLOY, -1.58% off 1.6%.

The struggling U.K. financial sector left London’s FTSE 100 UK:UKX underperforming on Tuesday with a 0.1% loss, while Frankfurt’s DAX DX:DAX gained 0.2% and the CAC 40 FR:PX1 in Paris added 0.5%, the latter benefiting from gains in luxury groups after Hermes RMS, +2.59% reported better-than-expected results.

A spectacularly poor performer was CAB Payments CABP, -73.63%, whose shares plunged 73% after the fintech group specializing in foreign exchange and payment services to emerging markets cut its revenue forecasts for the year by 17% and warned on profits. The shares have lost more than 80% since undertaking an IPO in London as recently as July.

Meanwhile, in the government bond sector, 10-year German yields fell 4.6 basis points to 2.830% after a gauge of activity in the eurozone manufacturing and services sectors fell to its lowest level in just under three years.

The euro, which had earlier been higher on the day, later traded down 0.3% to $1.0634 as analysts reasoned that the recent economic data out of the eurozone made it very unlikely the European Central Bank will raise interest rates after its policy meeting on Thursday.

“The ECB is widely predicted to keep its main policy rates unchanged on Thursday, the first time this will have happened since June last year. Money markets are pricing in no chance of a move with the next fresh staff economic forecasts coming in mid-December after last month’s updated projections,” said Jamie Dutta, market analyst at Vantage.

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