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UPDATE 3-Bad debt charge overshadows trading surge at Barclays

* H1 profit falls to 1.3 bln stg vs 3 bln in H1 2019

* Struggling consumer unit outweighs strong trading

* Bank warns headwinds to persist on capital, income (Updates shares, adds analyst comment, graphic)

LONDON, July 29 (Reuters) - Barclays set aside a higher than expected 1.6 billion pounds ($2.1 billion) to cover a possible rise in loan losses in the second quarter and warned a grim outlook and low interest rates would hurt profits into 2021.

The COVID-19 pandemic has forced banks globally to set aside billions to cover bad loans and the British bank’s consumer business is under pressure from lower interest rates, smaller credit card balances and personal loan repayment holidays.

Barclays booked pretax profit for the first half of the year of 1.3 billion pounds, down from 3 billion pounds a year ago as provisions against potential bad debts outweighed improved revenues from its investment bank.

Barclays’ trading performance was a bright spot as virus-induced market volatility prompted a 60% jump in trading revenues in foreign-exchange, rates and credit trading.

However, the bank’s shares were down 4.3% at 0756 GMT amid fears higher future impairments and dwindling consumer income would outweigh the investment banking revenues.

“I think the market rightly sees that still as lower quality, less stable revenue,” Goodbody analysts said.

The markets division posted a 49% rise in revenue to 2.1 billion pounds, an endorsement of the strategy adopted by Chief Executive Jes Staley, who has championed the investment banking business contrary to the wishes of activist shareholder Edward Bramson, who wants to shrink it.

Barclays was expected to report credit impairment charges and loan loss provisions of 1.42 billion pounds for April-June, according to analysts’ average forecast compiled by the bank.

The latest provision takes the half-year total to 3.7 billion pounds, and analysts expect that to rise to 5.79 billion pounds for the full year.

Barclays said impairments in the second half were unlikely to reach levels seen in January-June, assuming no change in economic forecasts.

It says it has been conservative in its approach to forecasting an economic recovery and provisioning against bad debts, with coverage of unsecured loans much higher than the actual default levels seen in the 2008 crisis.

“If you look at our underlying credit performance at the moment it’s relatively benign, our delinquency statistics don’t feel like the headlines you are hearing,” finance director Tushar Morzaria told reporters on a conference call.

The bank also said it would see short-term pressure on efforts to keep costs low, as it spends on various COVID-19 related initiatives.

Elsewhere in Europe, Spain’s Santander reported a record quarterly loss after booking a 12.6 billion euro hit in the second quarter, the largest impairment charge yet for a European bank in the pandemic.

Deutsche Bank, which competes with Barclays for investment banking revenues, posted a second quarter loss, but echoed Barclays’ upbeat trading performance.

Barclays’ capital ratio was 14.2%, up from 13.1% at the end of March, as recent regulatory changes boosted its reserves. Barclays flagged the capital boost earlier this month.

However, the bank warned its capital buffer could come under pressure in the second half of the year.

($1 = 0.7740 pounds)

Reporting by Lawrence White and Sinead Cruise, editing by Carmel Crimmins and Mark Potter

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