Mixed bag for Barclays as key division triggers profit miss

Compared to its own high standards, this update from Barclays (LSE:BARC) is something of a mixed bag which is unlikely to blow away the clouds which have been hovering over the sector.

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At the headline level, there is little cause for concern with a 3% rise in income to £7.4 billion, ahead of the expected £7.1 billion. Pre-tax profit of £2.3 billion is up by 12% but slightly shy of estimates.

In the Investment Bank, which accounts for 42% of group revenues, the recent US experience of the large names was echoed. Equity income rose by 47%, but Fixed Income, Currencies and Commodities (FICC)  was 19% lower leading to an overall 4% gain. Investment banking fees and advisory rose by 13%, with other highlights coming from Barclays UK Corporate, where the Return on Tangible Equity (ROTE) was 23.5% and income up by 10%, and 7% growth in UK business loans.

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At a group level, a cautious impairment provision of £500 million was 20% lower than the previous year, with defaults remaining stable and far from ringing any alarm bells.

More broadly, the lender reiterated its financial muscle with a further £500 million share buyback, in addition to the £1 billion announced at the interim results. This is part of the group’s ambitious aim of £10 billion of returns between 2024 and 2026, and then £15 billion of returns between 2026 and 2028. The buyback route is currently one which Barclays favours, as opposed to a pedestrian dividend yield of 2.7% and indeed buybacks will increasingly lead to less shares in issue which will by definition drive earnings per share growth.

At a more granular level, there are pockets which may raise the eyebrows of some investors. While the key metrics remain solid, for the most part they are weaker than those reported at the half year, which leaves the final quarter with some heavy lifting to do.

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ROTE of 11.7% for the quarter compared to 14.8% at the interims and the cost/income ratio was at 62% versus 55% previously. Elsewhere, the US Consumer Bank saw income decline by 1% and ROTE fall from 13.5% to 10.9%, although the numbers were muddied by the inclusion of Best Egg, which Barclays acquired in May for £600 million. Barclays UK saw income growth of 4% largely due to the impact of the structural hedge, but numbers were contained by ongoing investment into its Wealth proposition, where income nonetheless managed a 10% gain.

In addition, there are other factors at play which have weighed on the share price of late, to the extent that the shares have fallen by 20% over the last three months. On the one hand, reports earlier in the week that the Bank of England was examining whether Barclays traders had misrepresented illiquid private credit loans by using derivatives led to a decline on the day. While the outcome, if proven, would be an act of self-harm on the part of Barclays, the other issue is one outside of its control.

Indeed, the UK banks have an additional hurdle to overcome in the form of the imminent Budget. The sector has underperformed so far this year on a number of concerns, one of which is the bank surcharge. One market estimate suggests that the bank surcharge will be returned to 8% from the current 3% which in turn would reduce earnings by a possible 6%, although whatever the outcome some of the uncertainty which has been overhanging the banks would be removed.

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On balance, these concerns have blemished the investor confidence which was clearly in evidence at the interims, even though the longer-term picture remains solid and where Barclays has maintained its guidance for this year and next. Prospects for its three largest units, the Investment Bank, Barclays UK and Barclays US Consumer Bank are the main drivers and it may yet emerge that this quarter’s slightly uninspiring update is a blip rather than establishing a weaker trend.

Despite the quarterly share price weakness and the heightened expectations which have resulted in a weaker opening price today, the direction of travel remains intact, with the shares having posted a gain of 15% over the last year, as compared to a hike of 13% for the wider FTSE100. Over the last two years, the price is ahead by 74% and there seems little doubt that the group’s financial strength, alongside its geographical and business diversity are factors which keeps the stock in demand among investors, such that the market consensus of the shares as a buy should remain untroubled.