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* Bank makes provision to settle UK, US foreign exchangeprobes
* Q3 adjusted profit up 15 pct to 1.6 billion pounds
* Investment bank profits slump 39 pct on year
* Costs fall to lowest quarterly level for 5 years
* Shares flat as retail, credit card arms improve (Adds comments from finance director, details)
By Steve Slater
LONDON, Oct 30 (Reuters) - Barclays Plc set aside500 million pounds ($800 million) in the third quarter to coverpotential fines for rigging currency markets, taking the shineoff a rise in profits as its retail business performed well andcosts were cut.
The British bank on Thursday joined other big rivals insignalling that a settlement over alleged manipulation of the$5.3 trillion-a-day foreign exchange market is near withregulators in both the United Kingdom and the United States.
"These are ongoing discussions with certain regulatoryagencies and it's our best estimate of what we feel is theprovision required as a consequence. The discussions are fluidand they are continuing," Barclays Finance Director TusharMorzaria told reporters, declining to comment further.
Barclays is one of six banks in talks with UK regulators topay about 1.5 billion pounds in a group settlement, sources havesaid. They said a deal could come in mid-November and U.S.regulators were also working on a group payment.
JPMorgan, UBS and Deutsche Bank each set aside more than $1 billion in the third quarter forextra legal costs, which sources have said is mostly to coverpotential fines relating to currency market investigations.Royal Bank of Scotland and HSBC are expected tomake provisions on Friday and Monday respectively.
Past conduct problems continue to dog Barclays ChiefExecutive Antony Jenkins as he tries to improve profitability,standards and conduct by shrinking the investment bank, slashingcosts and axing underperforming units.
Barclays is shifting to become more reliant on retailbanking, rather than more volatile investment banking.
The bank said costs in the third quarter fell to theirlowest level for five years, and were down 7 percent so far thisyear. Barclays has cut 7,800 jobs in the last 12 months out of19,000 it expects to axe by the end of 2016.
Its shares were down 0.5 percent at 219.4 pence by 1140 GMT,outperforming a 1.9 percent drop by Europe's banking index. Analysts said the cost cuts, the performance of itsretail bank and its credit card arm, Barclaycard, were good.
"Barclays' transition from investment banking towards retailbanking continues, with the three retail divisions accountingfor 80 percent of third-quarter core profitability," said AndrewCoombs, analyst at Citi, who rates Barclays' shares a "buy".
COST CUTS
Barclays reported underlying pretax profit in the threemonths to the end of September of 1.6 billion pounds, up 15percent from a year before.
Retail banking profits rose 11 percent from a year ago andat Barclaycard they climbed 16 percent, but investment bankingprofits slumped 39 percent to 284 million pounds.
Investment bank revenues dropped 10 percent in the quarterfrom a year ago as fixed income, equities and advisory incomeall fell. Its drop in revenue contrasted with a 17 percentincrease on average across the big U.S. investment banks.
"We see Q3 results as a clear indication of a deleveraginginvestment bank under significant pressure -- especially inbusinesses such as prime services and equities which have beenimpacted by dark pools, deleveraging repo books and a cost focusfrom management," said Chirantan Barua, analyst at Bernstein.
Barclays said it had been hurt by a client retreat after NewYork's attorney general accused it of lying about its high-speedtrading venue, known as a dark pool. Barclays is fighting thelawsuit.
"The dark pools allegations that happened right at the startof the quarter have had an impact," Morzaria said.
Barclays set aside another 170 million pounds to compensatecustomers for mis-sold loan insurance products, taking its billfor payment protection insurance to 5 billion pounds.
The latest rise was largely offset, however, by a 160million pound reduction in its provision for compensation tosmall businesses mis-sold interest rate hedging products.
The bank's leverage ratio, which measures capital as apercentage of assets without adjusting for risk, nudged up to3.5 percent at the end of September from 3.4 percent in June.
UK regulators are expected to lift the minimum leverageratio requirement for banks to between 4 percent and 5 percenton Friday, but give banks several years to get to that level.
That decision could force Barclays to accelerate its assetsales and shrinking of the investment bank, or constrain itsdividend, analysts said.
Morzaria said he was "very confident" the bank would improveits leverage ratio to above 4 percent and was ahead of its 2016timetable to do so.(1 US dollar = 0.6250 British pound) (Additional reporting by Matt Scuffham; editing by ClaraFerreira Marques and David Clarke)
