Barclays Earnings: Challenging Deposit Environment Weighs on Net Interest Margin Outlook

Barclays BARC 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.

Net interest margin at Barclays UK showed a material step down in the quarter to 304 basis points from 322 basis points a quarter ago. While the structural hedge remains a positive contributor to NIM, deposit pricing, volumes and mix in combination with weakening product margins on mortgages are taking their toll. Deposit outflow, albeit a very slow pace (GBP 6.6 billion to a total of GBP 243 billion quarter over quarter), has been a constant drag for Barclays over the last quarters. Furthermore, higher pass-through of higher base rates to savers as well as deposits shifting, with time deposits taking a bigger share of Barclays’ deposit mix has been weighing on NIM.

Barclays lowered its NIM guidance again as a result, now expecting the margin for the full year to land between 305 and 310 basis points. The second downgrade in NIM guidance in a row signals the shifting margin dynamic in the U.K. but also reflects the difficulty of foreseeing developments in deposits, product margins, and base rates in the short term. We expect Barclays’ U.K. peers to post a similar dynamic in the next couple of days. We will keep a particular eye on deposit developments at peers, which we believe could be more beneficial at Lloyds, which remains our preferred pick in the space.