Barclays plc (BARC) Ordinary 25p
HL comment (28 April 2022)
Barclays first quarter total income rose 10% to £6.5bn, reflecting a 26% increase in net interest income to £2.3bn and a 3% rise in other income to £4.2bn. Operating expenses were 15% higher, including a £523m litigation and conduct charge, relating to the overselling of US securities and customer compensation relating to an old loan book. As a result, pre-tax profit fell 7% to £2.2bn.
The £1bn buyback has been delayed for a second time. This is because of ongoing discussions with the SEC relating to the US securities scandal. Barclays says it's committed to the programme and intends to start it "as soon as practicable".
The shares rose 1.2% following the announcement.
The sound of regulators knocking on the door is never good for a bank. The mishandling of US securities is unhelpful for sentiment to say the least, and raises some governance questions. It's also resulted in over £500m of charges so far, wiping out what would have otherwise been a reasonable profit performance. Investors will also be disappointed the debacle has caused the buyback to be delayed a second time. But, while this blunder is unfortunate, it's not a derailment of the investment case.
The mortgage book is going from strength to strength, with mortgage lending up almost £10bn in the UK last year. That was thanks to a combination of new applications and customer retention. Mortgages are a source of long-term income. Rising interest rates have also 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 the sixth largest global investment bank - 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 historically low interest rates don't have quite as much of a negative effect. That's not to say they have no meaning for Barclays - far from it, but it softens 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 US error has dented this. 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. We must admit, we'd like clarity on the timing of the buyback which should commence in the not too distant future.
Looking to wider conditions, Barclays has put aside £141m as an impairment charge, partly relating to a weakening economic outlook, specifically "geopolitical uncertainty and cost of living pressures". However, reduced unsecured lending balances means impairment charges are expected to remain below the lofty amounts seen during the pandemic. This shouldn't be a core focus at this stage, but a worse than expected turn in the macro environment could see profits under pressure.
Barclays offers something a little different to the rest of the sector. It's more diversified, and that has been well rewarded over the last 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 in the short term.
Barclays key facts
- Price/Book ratio: 0.42
- 10-Year Average Price/Book ratio: 0.60
- Prospective dividend yield (next 12 months): 5.7%
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.
Full year results
Net interest margin (which shows the difference between what the bank charges borrowers and pays for funding) was 3.06%, compared to 2.92% last year. Loans and advances to customers, excluding the impact of the over-selling of US securities, rose from £345.8bn to £361.5bn.
Non-interest income rose 5% to £310m in the UK business. Interest income also rose 5%, but continues to make up a much bigger part of the total, at £1.3bn. Performance is being helped by rising interest rates and mortgage lending.
Total income rose 10% in the International business, to £4.8bn. This was largely driven by a 26% rise in trading income to £2.4bn, helped by increased market volatility. Income from fees and commission fell 16% to £1.4bn, partly because of high comparisons with last year.
Barclay's recognised an impairment charge of £141m, up from £55m last year. That reflects increased levels of missed payments in unsecured loans. Barclays' cost:income ratio was 63% compared to 61%.
The group's year-to-date CET1 ratio - an important measure of banking capitalisation - fell to 13.8% from 15.1% at the end of last year, partly because of the effect of regulatory changes.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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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