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Barclays - profits up, impairment charges increase

Total income rose 9% to £6.0bn in the third quarter, with growth in Consumer, Cards and Payments offsetting...

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Total income rose 9% to £6.0bn in the third quarter, with growth in Consumer, Cards and Payments offsetting declines in Corporate and Investment Bank at Barclays UK. Declines there were led by lower fees from investment banking activity.

Net interest margins (the difference between what a bank earns in interest on loans and pays on deposits) rose to 2.78% from 2.53%, as the group benefitted from higher interest rates.

Excluding the impact of the over-issuance of Securities in the US, for which Barclays has been fined by the SEC, group income was £6.4bn.

A weaker economic outlook means the group recognised a £400m non-cash charge in readiness for an expected increase in loan defaults. That was an increase from £100m a year ago.

Operating costs were broadly flat at £3.6bn, and pre-tax profit of £2.0bn was 5.6% higher. Across the year-to-date, litigation and conduct costs have increased over £ 1.0bn, largely reflecting the SEC fine.

Barclays' CET1 ratio (an important measure of a bank's capitalisation) fell to 13.8% from 15.1%, reflecting an increase in riskier assets.

Barclays said full year operating expenses are expected to be around £16.7bn and is targeting a CET1 ratio of 13-14%.

The shares were unmoved following the announcement.

View the latest Barclays share price and how to deal

Our View

Rising interest rates have helped Barclays enjoy a boost to income from traditional loans and repayments. That's a case of the rising tide lifting all ships, though. There are some Barclays specific things to keep in mind.

Barclays is one of the world's largest global investment banks - a fact sometimes overlooked. This means it's far less reliant on traditional interest income, and instead generates most of its income from fees, commission and trading. This different model is an area of potential growth over the long term. Public and private markets are growing, and some investment banking competitors have reduced their activity, meaning market share is there for the taking.

This means interest rates don't have quite as much of an impact for the group. That's not to say they have no meaning for Barclays - far from it, but it has softened the blow in times of low rates.

Barclays is well capitalised, even over capitalised. It currently has a CET1 ratio - which is a key measure for capitalisation - some way higher than the regulatory minimum, although the recent over-issuance of US securities has dented this (more on that later). That's underpinning a generous share buyback programme as well as a progressive dividend (current prospective yield of 5.7%). Remember, no dividend is ever guaranteed.

Looking to wider conditions, Barclays has put aside £400m as an impairment charge in the third quarter, as recession fears ramp up. Consumer activity in the UK fell in the third quarter, impacting income. We're seeing weakness in UK consumers already. Despite there being higher card transaction-based revenues because of improved spending, borrowers are paying down their debt and taking on reduced loans as the economy weakens. That reduces the group's ability to earn interest. A worse than expected turn in the macro environment could see profits under pressure.

We also can't brush aside governance concerns. Barclays is under the scrutiny of regulators for the mishandling of US securities. This is unhelpful for sentiment to say the least. It's also resulted in over £ 1bn being put aside to pay fines, taking underlying profits with it. While this blunder is unfortunate and embarrassing, it's not a derailment of the investment case. Another similar misstep could be.

Barclays offers something a little different to the rest of the sector. It's more diversified, and that has been well rewarded in the past couple of years. That reduces its exposure to interest rates but doesn't eliminate it. Given Barclays' diverse revenue base, the valuation doesn't seem too demanding, though the recent governance questions do increase risk, and a deep recession would result in ups and downs.

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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 26th October 2022