Company Reports

In the UK, Barclays operates what we believe to be a strong retail franchise underpinned by a market-leading share in credit cards. The international segment is dominated by a bulge-bracket investment bank, one of the last full-service global investment banks headquartered in Europe. It also includes a credit card and current account business in the US and a global wholesale banking operation. Both segments contribute about equally to income.

Barclays reported first-quarter profit before tax of GBP 2.3 billion, nearly 4% ahead of consensus estimates collected by the bank prior to the release. During the quarter, Barclays took its first steps on its new strategic path, which it believes can achieve structurally higher profitability. Of the GBP 1 billion in gross cost savings slated for 2024, the UK banking group achieved GBP 0.2 billion in the first quarter, getting off to a decent start. During the quarter, it also announced the acquisition of the Tesco retail banking business, the sale of its performing Italian mortgage book portfolio, as well as the sale of $1.1 billion in US credit card receivables. Operationally, performance was decent in the quarter. Barclays posted a return on tangible equity of 12.3%, ahead of its above 10% guidance for 2024. Compared with the quarter a year ago, traction across most business units slowed, which was, however, within expectations. We maintain our GBX 210 per share fair value estimate and no-moat rating.

Barclays reported fourth-quarter operating profits before tax of GBP 110 million versus GBP 1.310 billion a year ago after booking GBP 927 million in structural costs. Excluding these charges, performance was within expectations with income down 3% and a cost/income ratio of 71%. Barclays also published a new strategic update, which entails reshuffling divisions as well as some plans for smaller disposals. After Reuters reported that management had been engaging in various scenarios to address its lagging performance, in particular its investment bank, we see little has changed dramatically after going over the new strategic direction. Positively, Barclays intends to return at least GBP 10 billion in shareholder distributions between 2024 and 2026 with a preference for share buybacks following its new 12% return on tangible equity target by 2026. We maintain our GBX 210 per-share fair value estimate and no moat rating.

In the U.K., Barclays operates what we believe to be a strong retail franchise underpinned by a market-leading share in credit cards. The international segment is dominated by a bulge-bracket investment bank, one of the last full-service global investment banks headquartered in Europe. It also includes a credit card and current account business in the U.S. and a global wholesale banking operation. Both segments contribute about equally to income.

Barclays reported third-quarter operating profits before tax of GBP 1.885 billion, down 4% from a year ago. Excluding the impact of the over-issuance of securities in the third quarter last year, income declined 2%, driven by a 2% decline in Barclays U.K. and a 6% decline in the corporate and investment bank. The consumer, cards, and payments segment did offset part of this weaker performance by growing 9% on the back of higher U.S. card balances, but weakening net interest margins and lower volatility and activity across markets held Barclays back overall. We maintain our GBX 208 per share fair value estimate and no-moat rating.

No-moat Barclays reported second-quarter profit before tax of GBP 1,964 million, slightly ahead of the Barclays-collected consensus estimate of GBP 1,907 million. We maintain our GBX 208 per share fair value estimate.

No-moat Barclays posted a strong 15% return on tangible equity for the first quarter. A strong recovery in consumer, cards, and payments supported by the Gap portfolio the bank closed in the second quarter last year and a good quarter in the corporate and investment bank stood out positively in this earnings release. The return of card balances, especially in the United States, resulted in higher loan losses, however. We maintain our fair value estimate of GBX 208/$10.10 per share.

Stress has returned to the European banking system less than a week after a solution for Credit Suisse had been announced. Shares in European banks have traded down through March 24 around midsingle digits, with Deutsche Bank taking the brunt of it, down 15% at its lowest point intraday. We maintain our fair value estimates and moat ratings across our European banking coverage. Allianz remains our Best Idea. Admiral is one of our top picks

With Credit Suisse shoring up liquidity, concerns around a banking crisis spreading in Europe have been firmly planted. While we expect that the next days and weeks will remain volatile, we do not currently see a liquidity crisis spreading through the European banking system. The issues at Credit Suisse are idiosyncratic in nature and we believe containable for now even in a worst-case scenario. With capital and liquidity levels high across the board, asset quality still good, and regulators much better equipped than 15 years ago to quell any sparks, we believe European banks are solid. The major caveat being that developments are currently happening at a rapid pace and views we form today may be stale tomorrow. We believe investors are best placed in European banks with a greater retail focus and a sound profitability outlook. We would highlight BBVA, Handelsbanken, ING, and Lloyds.

No-moat Barclays reported fourth-quarter profit before tax of GBP 1,310 million, down 8% versus the same period a year ago. Total income grew 12% to GBP 5,801 million, driven by 16% growth in Barclays U.K. and 46% growth in consumer, cards, and payments. Loan losses of GBP 498 million were slightly elevated as the macroeconomic outlook deteriorated further in the quarter. For 2023, the bank now guides for loan losses of 50 basis points to 60 basis points, approaching the 70 basis points we assume as a midcycle loan-loss ratio for Barclays. We maintain our GBX 208 per-share fair value estimate.

Barclays reported third-quarter operating profits before tax of GBP 1,969 million versus a GBP 1,808 million consensus estimate collected by the group itself prior to the release. A GBP 339 million reversal on litigation and conduct charges drove the outperformance. On an underlying basis, performance was decent, nonetheless. Total income grew 9% to GBP 5,951 million versus the same period a year ago on good performances in the U.K. and the cards and payments businesses offsetting the slowing but still well performing corporate and investment bank. The cost-to-income ratio, excluding litigation and conduct charges, worsened to 66% from 63% a year ago on higher operating expenses (up 14%). Inflation, investment spending, and the weakening British pound versus the U.S. dollar were the culprits of the higher operating expense outcome. We maintain our GBX 208 per share fair value estimate and no-moat rating.

In the U.K., Barclays operates what we believe to be a strong retail franchise underpinned by a market-leading share in credit cards. The international segment is dominated by a bulge-bracket investment bank, one of the last full-service global investment banks headquartered in Europe. It also includes a credit card and current account business in the U.S. and a global wholesale banking operation. Both segments contribute about equally to income.

In the U.K., Barclays operates what we believe to be a strong retail franchise underpinned by a market-leading share in credit cards. The international segment is dominated by a bulge-bracket investment bank, one of the last full-service global investment banks headquartered in Europe. It also includes a credit card and current account business in the U.S. and a global wholesale banking operation. Both segments contribute about equally to income.

No-moat Barclays reported second-quarter profits before tax of GBP 1,499 million versus a consensus estimate of GBP 1,631 million, which was collected by the bank itself prior to the release. Income generation was decent, but higher litigation and conduct costs have forced Barclays to raise its total cost outlook for 2022 materially to GBP 16.7 billion from GBP 15 billion previously. The strengthening U.S. dollar versus the British pound also contributed to this revised guidance. We raise our fair value estimate to GBX 208, from GBX 185 per share previously, despite the short-term cost spike flagged by management. Expenses are expected to grow on an underlying basis, due to inflation filtering through to wage growth as well as investment spending; however, the one-off nature of the elevated litigation and conduct charges in 2022 are less meaningful as a driver of our fair value estimate. Moreover, we lifted our net interest margin assumptions after incorporating the rapid interest-rate hike cycle being followed by U.S. and U.K. central banks, which results in better operating efficiency over the medium term, with income outpacing expenses.

No-moat Barclays reported first-quarter profits before tax of GBP 2,234 million, down 7% from the same period a year ago. The decline originated from higher litigation and conduct charges of GBP 523 million, which were primarily related to the overissuance of securities in the U.S. as well as slightly higher credit impairments. The one-off litigation charges aside, performance was good and we maintain our GBX 185.00 per share fair value estimate.

No-moat Barclays reported fourth-quarter profits before tax of GBP 1,474 million versus GBP 646 million a year ago. If we clean the results for volatile credit impairments and releases, profits before tax were still up a respectable 12%. Income at its corporate and investment bank continued to normalise with FICC and equities income down 33% and 8% respectively year over year, while advisory and equity capital and debt capital markets fees continued to perform strongly. Barclays U.K. performed well, with income up 5% to GBP 1,699 million. Over the next year, the net interest margin is expected to increase to between 2.6% and 2.7% from 2.5% at the end of the last quarter, providing a tailwind through the year in the U.K. business. At group level, operating costs were up slightly (1%) on higher structural cost actions in the U.K. business and investments in business growth. Inflationary pressures are expected to drive base costs up during 2022, although Barclays should be able to offset some of the increase with efficiency savings. We maintain our fair value estimate of GBX 185 per share.

No-moat Barclays comfortably passed the Bank of England’s stress test. At its lowest point, Barclays’ common equity Tier 1 ratio dropped to 8.2% from a starting point of 14.3% at the end of 2020, on a fully loaded basis. This was comfortably above the minimum of 7.0% regulators believe Barclays should hold in capital reserves. The stress test aims for a plausible and severe macroeconomic scenario, which is significantly more punitive than what the U.K. economy experienced during 2020. However, we would highlight that the scenario for the U.K. economy was harsher than for the global economy. As such, Barclays’ geographical diversification benefits the bank relative to the more U.K. focused banks in our coverage. Overall, the bank appears adequately capitalized, will remain functional without capital infusions in such a severe macroeconomic scenario, and does not rely on transitional accounting arrangements to smooth capital drawdowns throughout the stress. We maintain our GBX 185 per share fair value estimate.

Over the first nine months of this year, no-moat Barclays recorded profit before tax of GBP 6.90 billion versus GBP 2.40 billion. These results are however heavily affected by credit impairment charges in the period last year (GBP 4.30 billion) and releases year to date (GBP 0.60 billion). Excluding this line item, performance was decent. Total income generation was flat at GBP 16.80 billion, although the depreciating U.S. dollar versus the British pound was partially to blame. Operating expenses came in 6% higher than a year ago, driven by structural costs to improve its efficiency in the longer term as well as higher performance fees, which was only partially offset by the before mentioned foreign-exchange movement. We plan to take a fresh look at our model and anticipate a modest increase to our fair value estimate as a result of improving interest-rate expectations and lower loan losses than we had feared. Our no moat rating is unchanged.

No-moat Barclays reported secondquarter profit before tax of GBP 2,580 million, up 8% versus the first quarter this year. This performance was, however, masked by a substantial loan loss reversal of GBP 797 million booked in the second quarter. On a pre-provision profit before tax basis, which we think is a better comparison as the credit impairment line remains volatile, results dropped 38%. The culprit of this seemingly weak performance can be found in fixed income, currencies and commodities, equities and corporate lending within its investment bank. These had performed exceptionally well over the last year and made up for weaknesses in Barclays' retail business as a result of the pandemic. As such, we don’t think this performance is cause for concern. In its U.K. business, Barclays showed some good developments on both mortgage volumes as well as margins, although unsecured balances are still posing a drag. We maintain our GBX 185 per share fair value estimate.

The Prudential Regulation Authority, or PRA, in the United Kingdom has removed all capital distribution restrictions on large U.K. banks. We think the move was well-anticipated by the market and should have a minimal impact on share prices of the U.K. banks we cover. However, it does support our view that Barclays, Lloyds, and NatWest are adequately capitalized. We expect all three banks to give an update on their capital distribution plans during the upcoming second-quarter earnings releases. We estimate the banks have approximately 6% (Barclays), 13% (Lloyds), and 29% (NatWest) of their current market capitalization in excess capital available for distribution.