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Barclays - beats expectations, but deposit pressure ramps up

Barclays has reported third-quarter income of £6.3bn, down 2% excluding the impact on last year's performance from the over-issuance of securities.

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Barclays has reported third-quarter income of £6.3bn, down 2% excluding the impact on last year's performance from the over-issuance of securities. Performance was mixed across divisions, with growth from higher rates in the UK and rising US card balances more than offset by lower investment banking activity, consumers shopping for better deposit rates and ongoing mortgage headwinds.

Profit before tax of £1.9bn and return on tangible equity of 11% were ahead of expectations, helped by losses for potential bad loans that were better than forecast.

Capital levels remain at the top end of the target range, with a CET1 ratio of 14%. The £750m buyback announced at half-year results was completed in the quarter.

The shares fell 6.7% in early trading.

View the latest Barclays share price and how to deal

Our view

Markets remain focused on UK net interest margin (NIM - the profitability of borrowing/lending operations) guidance, which has been cut again. That's not pleased investors and has outweighed profit that was better than expected.

Higher interest rates were still the main driver of profit growth, but further benefits from here look unlikely and the dip in UK deposits was worse than expected - one of the main reasons guidance on NIM was lowered. Consumers are shifting to less profitable fixed-term accounts or shopping around banks in search of better cash returns, a trend that's expected to continue.

The mortgage market's also been a headwind for most banks, but there was some positive news that trends here are starting to improve. Add in the ongoing benefit from the structural hedge (essentially a bond portfolio that should yield higher returns as older contracts mature), and there are reasons to be optimistic about UK interest income into 2024 and beyond.

But Barclays is a well-diversified beast, and the UK's just one part. It's also one of the largest global investment banks and has a sizeable UK/US credit card business.

Higher rates along with increased US credit card balances, are proving a tailwind, but it can be a double-edged sword. With consumer income under pressure, higher loan rates mean banks must prepare for future defaults. That comes in the form of impairment charges, which could increase if economic conditions sour.

For now, consumers are being prudent with their finances. Arrears for UK cards are low, and though there's been an uptick in the US, levels remain in line with pre-pandemic. Nevertheless, it's an area to watch.

Turning to the investment bank, the largest business unit that accounts for almost half group income. Fees continue to come under pressure as activity in the market remains subdued, given the broader uncertainty. Tough comparable periods also mean driving growth this year's a tough ask. Still, it's one of the best outfits outside the US and offers a different avenue for income compared to UK-focused peers.

Looking to the balance sheet, Barclays remains well capitalised. There's plenty of scope for further returns beyond the 6.8% forward yield. However, investors will be eagerly waiting to hear more from an update along with full-year results due to cover distributions. Of course, no returns are guaranteed.

Barclays continues to trade at a discount to European peers, largely a result of poor image from a slew of governance mishaps and a lack of faith that recent returns are sustainable. It's a valid perspective, but one that's now perhaps been a little overdone. There's rerating potential if returns can prove consistent, but with the investment banking arena looking dicey we prefer some of the other names in the sector.

Barclays key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt-Britzman
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 24th October 2023