Barclays (LON:BARC) has shown stable rather than dynamic growth over the quarter, beating expectations on most measures but with some question marks over its US operations.
Overall income declined by 4% to £7 billion, which was marginally ahead of the estimated £6.9 billion, with pre-tax profit of £2.3 billion comparing with £2.6 billion the year previous, but again ahead of expectations of £2.2 billion. Revenues were impacted by any number of factors, including mortgage margin pressure and adverse deposit dynamics at Barclays UK, lower inflation-linked income and a mixed performance from its investment bank.
Indeed, the performance of Barclays Investment Bank could lead to some investor disappointment. Recent strong numbers from the likes of Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) in the US were expected to read across to Barclays, whereas the unit reported an income decline of 7%. Fee and trading income for equities and debt were positive, but more than offset by weakness in fixed income and lower advisory fees. This is significant to the group’s overall performance, since the investment bank accounts for around half of total group revenue. The lower client activity and investment fees, the latter of which reflects a reduced fee banking pool as previously experienced by some of the bank’s US counterparts, dragged on numbers although the unit managed a Return on Tangible Equity (ROTE) of 12%, reflecting the benefit of diversified income streams.
Barclays US Consumer Bank saw income increase by 4% to £859 million, largely driven by higher credit card balances, although this came with something of a caveat, This rise in effectively unsecured lending has inevitably led to a small and containable increase in credit defaults, of which the bank is acutely aware. It has therefore taken the decision to increase the overall level of the impairment charge to £410 million (accounting for the majority of the group total of £500 million), reflecting this possibly higher level of delinquencies in US cards.
For the group as a whole, the balance sheet remains in strong shape and the key metrics for the most part were progressive. The ROTE figure of 12.3% may have dipped from 15% in the corresponding period, but it was ahead of the expected 11.7% and indeed comfortably in excess of the group’s 10% target. A cost/income ratio of 60% saw the benefit of some £200 million of cost efficiency savings, set against Barclays’ target of £1 billion for the year. The capital cushion, or CET1 ratio was also stable at 13.5%.
In terms of corporate activity, the group is looking to consolidate some of its more profitable markets. The Italian mortgage book is being sold at a loss of some £225 million, while the acquisition of Tesco (LON:TSCO) Bank is expected to complete by the end of the year, adding a further string to Barclays’ UK income bow. In terms of these numbers overall, Barclays UK was possibly the strongest performing unit in terms of improved contribution and the bank clearly has designs to capitalise on this strength.
In terms of outlook, Barclays has maintained its guidance for the year, including ROTE in excess of 10%, Net Interest Income of £10.7 billion and a cost/income ratio of 63%. Further out, the group is anticipating larger shareholder returns which are likely to be skewed towards share buybacks, thus providing some share price support. In the meantime a dividend yield of 4.2% provides another level of return for investors in addition to the capital returns more recently experienced.
Indeed, the shares have risen by 24% over the last year, compared to a gain of 1.9% for the wider FTSE100, including a strong rally of 42% over the last six months. The initial share price reaction to the numbers has also been positive and, with Barclays being a group with deep pockets and a diversified business model, the longer-term outlook remains one which continues to attract investors. As such, the market consensus of the shares as a buy is most likely to remain intact.