Barclays still preferred UK bank stock after Q3 results

Barclays (LSE:BARC) has kicked off the UK bank sector quarterly reporting season in some style, increasing prudent provisions in pockets of its business without detracting from the benefits of the group’s diversified business model.

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The group has had a good run of late, and much of that optimism 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 43% of group revenues, Barclays UK 31% and the Barclays US Consumer Bank 13%.

As had been hoped, the recent strength of the bank reporting season in the US has indeed read across to Barclays’ US Investment Bank, where overall income rose by 8% to £3.1 billion, underneath which was a hike of 23% in Net Interest Income and 5% in Net trading income. Despite any slowdown currently being experienced in the M&A and IPO space, general market volatility has boosted income at the trading unit, where income rose by 6% across fixed income and equities, with higher balances generally propelling revenues higher across the unit.

Barclays UK saw income increase by 16% to £2.25 billion, helped along by income from the so-called structural hedge, which lessens the group’s susceptibility to changes in interest rates. The addition of Tesco Bank to its portfolio has also immediately added a tailwind to revenues, despite some adverse deposit dynamics as customers seek higher rates elsewhere, although this appears to be stabilising.

At the US Consumer Bank, income growth of 19% to £941 million was largely driven by the acquisition of the General Motors card portfolio. The additional bonus in this unit was that the group is seeing no signs of deterioration across its portfolios and promisingly the level of defaults on its cards in both the US and the UK is broadly 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 also showed signs of significant strength and improvement on the whole. The Return on Tangible Equity (ROTE) came in at 10.6%, lower than 12.3% the previous year but at the same level in the year to date. A robust capital cushion, or CET1 ratio of 14.1% is also in place, with the direction of the cost/income ratio, dropping to 59% so far this year, impressive and boosted by the target for the year of £500 million in cost savings being achieved one quarter earlier than expected.

Group impairment charges of £600 million bring the total for this year to £1.7 billion, part of which is due to macroeconomic uncertainty in the US. Nearer to home, Barclays also increased its provision for motor finance redress to £325 million from a previous £90 million, although in a similar vein to Lloyds Banking, this could represent a worst case scenario rather than reflecting the actual outcome.

Barclays is also maintaining its stance on shareholder returns, with the announcement of a new £500 million share buyback programme, which it now expects to become a quarterly event. The group had previously guided that its shareholder returns would be skewed more towards buybacks rather than a progressive dividend policy and has maintained its ambitious aim of £10 billion of returns between 2024 and 2026. Indeed, buybacks will increasingly lead to less shares in issue which will by definition drive dividend per share growth.

Overall numbers revealed revenue growth for the quarter of 9% to £7.2 billion. While pre-tax profit of £2.1 billion was 7% lower than the same quarter last year, year to date the number is 13% higher compared to the corresponding period, underlining the progress which the group is achieving.

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With the group guidance for Net Interest Income also being raised to more than £12.6 billion from a previous £12.5 billion, and with the outlook remaining generally unchanged, there has been a warm reaction to the overall numbers. This adds to a share price which has risen by 52% over the last year, as compared to a hike of 13.5% for the wider FTSE100, and which has already gained by more than 37% this calendar year.

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.