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Barclays - first-quarter profit beats expectations

Barclays reported an 11% rise in income to £7.2bn in the first quarter.

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Barclays reported an 11% rise in income to £7.2bn in the first quarter. Growth was mainly driven by higher net interest income in the UK and higher credit card balances in the US. The large investment banking division saw income up 1%, a record first-quarter performance.

Net interest margin for Barclays UK, a measure of the profitability of lending and borrowing, rose from 2.62% to 3.18%.

Profit before tax rose 16% to £2.6bn, ahead of expectations. The impairment charge, which is put aside in preparation for loan defaults, of £524m was toward the lower end of guidance, and operating costs were broadly flat. Last year's figure included one-off litigation charges, excluding which, costs were up 14%.

The CET1 ratio (a vital balance sheet metric) was 13.6%, down from 13.9% in December 2022 and within the 13-14% medium-term target range.

Barclays is targeting a return on tangible equity of greater than 10% for the year and a net interest margin in the UK division of over 3.2%.

The shares rose 2.5% in early trading.

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Our view

After what was a disappointing end to 2022, Barclays needed to come out firing. And it's done precisely that. This was a very solid first quarter, comfortably beating market consensus on profit amidst a turbulent time for the broader banking sector.

Barclays is a well-diversified beast. Not only does it have your typical banking operations in the UK, but it's also one of the largest global investment banks and has a sizeable UK/US credit card business.

Higher interest rates were the main driver of profit growth over the quarter. The UK banking arm is an obvious benefactor, where net interest margin (a measure of the profitability of lending and borrowing) benefitted from higher UK rates. This tailwind should continue over the year. Perhaps less obvious is the impact on profit from credit cards. Higher rates, particularly in the US, plus a 30% jump in balances, pushed income from the division up almost 50%.

This is somewhat of a double-edged sword, though. The rate of rate increases means global economies are on the brink of recession. Banks must account for that risk, typically from a hit to profits in the form of impairments that aim to predict the value of debt defaults. The approximate £500m set aside over the quarter is certainly a huge chunk of money. The good news is it's toward the lower end of guidance, and defaults are still at very manageable levels.

Turning to the corporate and investment bank, the largest business unit that accounted for 56% of income over the first quarter. Traditional investment banking fees continue to come under pressure as activity in the market remains subdued, given the broader uncertainty. Still, that very same volatility boosts other areas like fixed-income trading, highlights the benefits of the diversified model. We remain supportive of the asset and market share's up for grabs as some players leave the space. But tough comparable periods mean driving growth this year's a tough ask.

Looking to the balance sheet, Barclays remains well capitalised. It currently has a CET1 ratio - which is a key measure for capitalisation - some way higher than the regulatory minimum and comfortably within the company's target range. We see scope for further buybacks and the prospective 6.1% yield added to the mix looks attractive. Of course, there are no guarantees.

Barclays offers something a little different to the rest of the sector. It's more diversified, providing a resilience that others may not have. It's one of the more heavily discounted banks, and we don't see this valuation as too demanding. But last year's governance questions do increase risk, and the credit portfolio would be vulnerable to a worse-than-expected squeeze on consumers.

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
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: 27th April 2023