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Barclays - weaker than expected end to the year

Barclays' income rose 14% to 25.0 billion pounds for the full year.

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Barclays' income rose 14% to £25.0bn for the full year. That reflects growth in all business divisions, with particularly strong growth in Consumer, Cards and Payments. In Barclays UK, the net interest margin, which shows the difference between what a bank earns in interest on loans and pays on deposits, was 2.86%, up from 2.52%.

Profit before tax was 14% lower at £7.0bn, this included a £1.2bn impairment charge, reflecting the weakening economic outlook. Profits were also impacted by £1.6bn of litigation and conduct charges relating to the mis-selling of US securities. Overall performance was worse than the market was expecting, led by the Corporate and Investment Banking division.

The group's cost:income ratio, an important efficiency measure, was 67% and in-line with last year. This is expected to come down to the low sixties in 2023.

A 5.0p full year dividend was announced, taking the total to 7.25p per share. A new £500m share buyback was announced.

The shares fell 8.3% following the announcement.

View the latest Barclays share price and how to deal

Our View

Barclays' full year performance was worse than expected, and there are some challenges to consider.

Barclays is one of the world's largest global investment banks - a fact sometimes overlooked. Fees in this division have been weaker than forecast, which is a natural fallout from a weaker economic environment. Profits have also been dented by Barclay's decision to recognise a £1.2bn impairment charge as it anticipates a higher number of loan defaults and broader weakening of consumer behaviour, because of the difficult climate. These elements are unhelpful, but they're also cyclical. We expect the tide to turn back in Barclays' favour in time.

The main bugbear with full year results is the hefty litigation costs, which have taken a chunk out of profits. This is very much a company-specific issue. Barclays is under the scrutiny of regulators for the mishandling of US securities. While this blunder is unfortunate and embarrassing, it's not a derailment of the investment case. Another similar misstep could be.

The short-term certainly holds some obstacles for Barclays. But we're still supportive of the business model. Barclays is far less reliant on traditional interest income, and instead generates most of its income from fees, commission and trading in normal times. 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. That's underpinning a new share buyback programme as well as a progressive dividend. We view the current buyback as quite cautious, which is prudent during tough times, but we think Barclays could afford to return more to shareholders. Remember, no dividend is ever guaranteed.

Barclays offers something a little different to the rest of the sector. It's more diversified, and that reduces its exposure to interest rates but doesn't eliminate it. Given its 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: 15th February 2023