Barclays plc (BARC) Ordinary 25p

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Barclays reported a 1% rise in second quarter income to £6.3bn. Performance was mixed across divisions, with UK consumer and corporate divisions losing ground due to mortgage pressure and deposit shifts. That was more than offset by improving investment bank performance and higher US card balances.

Profit before tax fell 1% to £1.9bn, better than the £1.6bn expected. The beat was driven by better income than expected and lower impairments, which came in at £384mn (£516mn expected).

The CET1 ratio, a key measure of capital levels, dipped from 13.8% to 13.6% (target range 13-14%). A 2.9p dividend was announced alongside a new £750mn buyback.

The shares rose 1.0% in early trading.

Our view

Barclays put in a good showing over the second quarter. The muted market reaction was more a reflection of how well the stocks done so far this year, with expectations higher than they have been for some time.

2024 will be more about trying to stabilise performance, than beat the year just gone. On that front, there are positive developments. Consumers have been shifting to higher rate, longer term, savings accounts over the past few quarters – bad for banking profit. But that shift is now slowing, and we think the bulk of the account swapping is behind us.

The mortgage market's also been a headwind for most banks, but trends are starting to improve. Add in the ongoing benefit from the structural hedge (essentially a bond portfolio that should yield higher returns as older contracts mature), and there are reasons to be optimistic about UK interest income into 2024 and beyond.

But Barclays is a well-diversified beast, and the UK's just one part. It's also one of the largest global investment banks and has a sizeable US credit card business.

Higher rates along with increased US credit card balances, have been a tailwind, but it can be a double-edged sword. Default rates on US credit cards continue to tick higher and while loan losses are still expected to be below levels seen last year, reserves are being tapped. This is an area to watch over the coming quarters.

The large investment bank is one of Barclays’ key differentiators and a driving force behind the better-than-expected second-quarter numbers. As we saw with some of the US giants, the long-awaited recovery in investment banking fees is starting to show its face. Activity in both the equity and debt markets is starting to come back, but there’s intense competition, and Barclays will need to work hard to keep pace with key US rivals.

The balance sheet is well capitalised and guidance points to £10bn in distributions over 2024-26, weighted toward buybacks. That’s around 30% of Barclay’s current market cap. It’s ambitious and no returns are guaranteed.

Barclays has had a material re-rating over the year so far. We think much of that is justified with the depressed levels seen for much of the past couple of years being unwarranted. From here, in our view, questions around the ongoing recovery from the investment banks and US consumer strength need answering before we see a further change in sentiment.

Environmental, social and governance (ESG) risk

The financials sector is medium-risk in terms of ESG. Product governance is the largest risk for most companies, especially those in the US and Europe with enhanced regulatory scrutiny. Data privacy and security is also an increasingly important risk for banks and diversified financial firms. Business ethics, ESG integration and labour relations are also worth monitoring.

According to Sustainalytics, Barclays’ overall management of material ESG issues is strong.

Barclays has some room for improvement regarding customer data privacy and environmental commitments. Despite strong policies overall, investigations are ongoing about alleged currency manipulation, and its data security could use strengthening with more frequent risk assessments and external audits. The quality of its environmental policy has deteriorated, with limited commitments to reducing emissions.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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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