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Barclays - rates provide a boost, benefits look to have peaked

Excluding the impact of securities over-issuance last year, Barclays reported half-year income of £13.5bn

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Excluding the impact of securities over-issuance last year, Barclays reported half-year income of £13.5bn, a rise of 9%. Growth was driven mainly by the higher rate environments and increased US card balances, which offset declines in the investment bank.

Net interest margin (NIM, a measure of profitability in borrowing/lending) for the UK business rose to 3.20% but is expected to drop from here with full-year guidance down from 3.20% to around 3.15%.

Profit before tax rose 3% to £4.6bn, ahead of expectations as the additional £896m set aside for potential loan losses was lower than expected.

On June 30th, the CET1 ratio, a key measure of financial resilience, was 13.8% - comfortably ahead of the required level.

The board has announced a half-year dividend of 2.7p and intends to buy back up to £750m worth of shares.

The shares fell 4.2% in early trading.

View the latest Barclays share price and how to deal

Our view

It's not overly surprising to see markets focused on UK net interest margin guidance, which saw a slight downgrade and pulled shares down on the day of half year results.

Higher interest rates were still the main driver of profit growth, but further benefits from here look unlikely. Headwinds from the mortgage book and consumers shifting away from current accounts in search of better rates limit the benefits and are working against margins.

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.

Perhaps a less obvious benefit of higher rates is the impact on profit from credit cards. Higher rates, particularly in the US, plus a rise in balances, pushed income from the division up 18%.

This is somewhat of a double-edged sword for banks. As rates rise, borrowing costs increase and loan arrears and defaults tend to rise. We're starting from a low base, which is a good thing, but new arrears are starting to creep higher. That's something bank's have to account for, and changes in the estimates of future loan defaults are taken as a charge in the income statement. Barclays set aside close to £900m over the half, a number that's expected to rise again over the second half.

Turning to the corporate and investment bank, the largest business unit that accounted for 51% of income over the half. 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 - though some peers are even more so. 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. The new buyback reflects that strength and when the 6.0% forward yield is added to the mix, returns look 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 July 2023