Barclays Gives Cautious Guidance for 2023

No-moat Barclays BCS 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 UK 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 50-60 basis points, approaching the 70 basis points we assume as a midcycle loan-loss ratio for Barclays. We maintain our GBX 208 fair value estimate.

Net interest margin of 310 basis points in the fourth quarter at Barclays UK did disappoint, given the magnitude of base-rate increases in the quarter and NIM of 301 basis points in the third quarter. Management highlighted product margin pressures as well as treasury activities, which did offset nearly the entire base-rate-related uplift in the quarter. It also warned that it expects similar headwinds in the first quarter of 2023. Mortgage margins have been under pressure since the rapid increase in base rates in 2022, but Barclays also pointed toward higher-than-expected churn. Remortgaging activity has picked up significantly at the low loan/value segment, which results in lower margins for Barclays. Overall, lower demand for mortgages and continued high supply of mortgage financing further weighs on product margins. The structural hedge should provide a tailwind through 2023, but product margins are unlikely to recover quickly. Moreover, deposit migration is expected to kick into gear this year, which will lower deposit margins and act as a headwind through the year. The exact timing of all these dynamics is difficult to pinpoint, but in sum, this explains Barclays’ rather cautious NIM guidance of more than 320 basis points for 2023.