Barclays firing on all cylinders

For the most part, this is an unblemished release with strong growth across all areas of the group and spectacular progress in some, as Barclays (LSE:BARC) kicks off the UK bank sector reporting season in style.

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For the six months ended 30 June, revenue growth of 11% to £16.5 billion and a rise of 17.3% in pre-tax profit to £6.1 billion were both comfortably ahead of estimates and largely driven by an exceptionally strong second quarter, where revenues and pre-tax profit grew by 16% and 32% respectively.

The drivers for the improvement were spread across its units, with notable contributions from its global markets operation within the Investment Bank, 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.

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The more general optimism towards the group from investors revolves around prospects for and performance of its three largest units. The Investment Bank (IB), which is for the most part a US division, accounts for 48% of group revenues, Barclays UK 27% and the Barclays US Consumer Bank 13%, all of which have had a strong story to tell.

The Investment Bank saw revenue growth of 11% to £7.99 billion, including a 20% spike in the second quarter. As recently seen in the US, market volatility led to sharp spikes in trading income (up by 19% to £2.27 billion in Q2), while IB fees and underwriting income also surged. The potential canary in the coal mine, a “single name” impairment charge of £228 million booked in the first quarter, is contained and has not been repeated elsewhere.

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Barclays UK saw revenue growth of 8% to £4.52 billion and a rise of 10% in pre-tax profit to £1.77 billion. 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 8% to £3.99 billion, largely driven by robust structural hedge income, the Return on Tangible Equity (ROTE) was 20.1% versus 18.6% previously, lending balances grew by 5% and digitally active customers increased from 13.7 million to 14.1 million, an ongoing tailwind for the longer term reduction of costs.

At the US Consumer Bank, income growth of 26% to £2.12 billion was largely driven by general business growth and higher Net Interest Income. This was despite the recent strength of sterling against the US dollar, which 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 ROTE was boosted to 24.2% from 7.3%, largely due to the one-off effects of a sale of the American Airlines tie-up, 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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The key metrics are also solid, with ROTE at 14.8% comparing with 13.2% previously (and guidance maintained for more than 12% this year an 14% in 2028). There were also improvements to the cost/income ratio (now 55% from 58%) and the capital cushion, or CET1 ratio to 14.3%, above the 13% to 14% target range.

With the previous £500 million completed, a further share buyback of £1 billion has been announced, which runs in tandem with a dividend hike which takes the projected yield to a pedestrian 2.2%, although this should be further 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.

The raising of the group projected income for the year to around £31.5 billion from £31 billion is perhaps typically conservative and brings a tinge of disappointment, but if the second-quarter momentum is maintained, expectations will continue to ratchet higher as the group delivers by firing on all cylinders.

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These heightened expectations, let alone a spike of 24% in the share price in the last three months leading up to these results, probably explain the relatively cold reaction in opening exchanges. In addition, the shares have risen by 47% over the last year, as compared to a gain of 19% for the wider FTSE100, and by 129% over the last two years.

That being said, there is little doubt that the group’s financial strength, alongside its geographical and business diversity are factors which keep the stock in hot demand. As such, the market consensus of the shares as a strong buy and a preferred play in the sector should be untroubled as Barclays marches on.