Barclays beats Q1 forecasts despite MFS hit  

The bank sector has been weighed down this year by the anticipated effects of the current conflict between the US and Iran, but for the moment the strength and diversity of the Barclays (LSE:BARC) offering is providing a strong shield.

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For the quarter, revenue growth of 6% to £8.2 billion and a rise of 3% in pre-tax profit to £2.8 billion were both comfortably ahead of estimates. The drivers for the improvement were spread across its units, with notable contributions from its global markets operation within the Investment Bank (IB), higher Net Interest Income (NII) and the ongoing benefit of structural hedge income, which lessens the group’s susceptibility to changes in interest rates while providing a meaningful tailwind to revenues.

The more general optimism towards the group from investors revolves around prospects for and performance of its three largest units. The Investment Bank, which is for the most part a US division, accounts for 49% of group revenues, Barclays UK 28% and the Barclays US Consumer Bank 12%, all of which have had a strong story to tell.

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The Investment Bank saw revenue growth of 4%, taking the figure to over £4 billion for the first ever time in a quarter. As recently seen in the US, market volatility led to sharp spikes in trading income, while IB fees and underwriting income. However, there is a potential canary in the coal mine which investors will be closely watching. A “single name” impairment charge of £228 million was a major contributor to the 5% decline in pre-tax profit to £1.62 billion and if, as suspected, the loss relates to the group’s exposure to the recent collapse of Market Financial Solutions (MFS), any wider implications will be sought.

Barclays UK saw revenue growth of 9% to £2.26 billion and a rise of 14% in pre-tax profit to £863 million. While there was a marginal increase in retail credit card delinquencies, the amount is small and containable and not, it would appear, symptomatic of any wider issues. Meanwhile, NII for the unit rose by 9% to £2 billion, largely driven by robust structural hedge income.

At the US Consumer Bank, income growth of 14% to £983 million was largely driven by the acquisition of the General Motors card portfolio and higher Net Interest Margin. Pre-tax profit of £236 million was considerably higher than the previous year’s £55 million, with the additional bonus in this unit being that the group is seeing no signs of deterioration across its portfolios. Promisingly the level of defaults on its cards in both the US and the UK is stable, which has not led to any immediate alarm bells. 

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More broadly, the more recent strength of sterling against the US dollar is something of a double-edged sword in that this strength negatively impacts revenue and profits, while having a positive effect on impairment charges and total operating expenses, especially Stateside.

The key metrics are also solid, with the Return on Tangible Equity (ROTE) at 13.5% (and guidance maintained for more than 12% this year an 14% in 2028), and improvements to the cost/income ratio (now 56%) and the capital cushion, or CET1 ratio to 14.1%. With the previous £1 billion completed, a further share buyback of £500 million was announced, which runs in tandem with a pedestrian dividend yield of 2% which should be boosted later in the year. The group increased its ambitious aim to £15 billion of returns between 2026 and 2028, as announced at the full-year results in February and, indeed, buybacks will increasingly lead to less shares in issue which will by definition drive earnings per share growth.

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The unexpected impairment charge has taken the headlines and the shares have added to a loss in the year to date of 11% in a weak opening reaction. Nonetheless, the results are broadly solid and the price remains ahead by 46% over the last year, as compared to a gain of 23% for the wider FTSE100, and by 109% over the last two years. 

Alongside such success come higher expectations, as is in evidence today, but underpinned by the group’s financial strength and its geographical and business diversity, there is little to suggest that the current market consensus of the shares as a strong buy and the preferred play in the sector will be troubled following this update.