Barclays profits tumble 12% as UK interest rates hit mortgage demand

Barclays also came under pressure to raise interest rates for savers, putting a further squeeze on the bank’s income.Photograph: Ian West/PA

Profits at Barclays tumbled by 12% in the first quarter, as higher UK interest rates weighed on demand for mortgages and loans while a backdrop of economic uncertainty affected its investment bank.

The UK bank said pre-tax profits fell to £2.3bn in the first quarter, down from £2.6bn last year, when it reported the strongest quarterly profit since 2011 after a string of interest rate hikes by the Bank of England.

While UK interest rates have since risen to 5.25%, allowing banks to charge more for loans and mortgages, the resulting pressure on households has dampened the appetite for borrowing. Barclays said loans and advances to customers fell by 1% in the quarter, “reflecting subdued mortgage lending amid lower market demand”.

However, executives confirmed the bank was increasing the share of high loan-to-value mortgages offered to customers, which could support a rebound in its loan book.

At the same time, banks such as Barclays have been under pressure to raise interest rates for savers, further squeezing its income. Competition has also been tough, with customers placing their cash with more generous rivals, and prompting a 2% drop in deposits at Barclays.

Overall, Barclays said net interest income, which accounts for the difference between money made from loans and money paid out for savings, at its UK bank fell by 4% to £1.5bn.

However, slightly brighter forecasts for the UK economy meant Barclays only put aside £58m for potential defaults, compared with £113m last year.

“Consumer behaviour continues to be very robust in the UK,” said the bank’s chief financial officer, Anna Cross. “We see customers managing their spending well and wisely. We also see continued conservative behaviour … so they continue to seek higher savings rates, and secure their mortgage financing early.”

Related: Lloyds profits fall as competition for mortgages heats up

Investors who had been holding out for better performance from Barclays’ investment bank, after bumper profits for Wall Street rivals such as Goldman Sachs, will have been disappointed with a 12% drop in pre-tax profits to £1.4bn. While it benefited from a rebound in the number of companies seeking to raise cash from investors on the stock market, it was hit by a drop in demand for its fixed-income services, which work in commodities, currencies and bonds. The chief executive, CS Venkatakrishnan, said the fixed income department’s earnings were “not as strong as we would have liked”.

The poor performance will help justify a corporate shake-up and a £2bn cost-cutting programme, announced by executives in February. The overhaul involved plans to shrink the size of the investment banking division, and shift more of the lenders’ focus to the “higher returning” consumer and corporate businesses.

Venkatakrishnan said the lender was “focused on disciplined execution of the plan” and had already delivered about £200m in savings of the £1bn he aimed to achieve this year. The bank, which has 94,400 global staff, did not give any further updates on pending job cuts. Barclays slashed 5,000 roles between October and December last year.