Disappointing results from Barclays PLC (LSE:BARC) sent shares nearly 10% lower on Wednesday but are investors right to mark sector peers Lloyds Banking Group PLC (LSE:LLOY) and NatWest Group PLC (LSE:NWG) down heavily as well?
Plenty can go wrong in three months and Barclays certainly packed a lot in today’s update with profits below forecasts, an underwhelming buy-back and unwelcome headlines about bankers’ bonuses at a time when customers are under pressure and MPs are looking for their next windfall tax candidate.
Starting with profits. We knew that litigation charges would make a hefty dent to figures with a £1.6bn cost following well publicised events in the US but what was concerning was a £498mln charge for bad debts in the fourth quarter.
The loan loss rate was 49bps in the quarter and the lender expects this to rise to 50-60bps in 2023 suggesting more pain is on the way, no surprise given the current macro outlook.
But of the £1.2bn annual total only £286mlm related to the UK suggesting Barclays' more diversified portfolio had holes elsewhere.
As AJ Bell investment director Russ Mould noted: “Barclays also has overseas operations and economic conditions in other parts of the world where it does business aren’t exactly rosy.”
This may suggest better, if not brilliant, news for more domestically focused rivals, Lloyds and NatWest, particularly when you delve further into the numbers.
Barclays was also held back by a poor performance in investment banking where a lack of mergers, IPOs and general deal-making hurt profits.
As Mould noted “This type of work can be very lucrative, so a dearth of deals will be painful to Barclays.”
But consumer lending remained strong boosted by higher interest rates. In Barclays UK, the net interest margin, which shows the difference between what a bank earns in interest on loans and pays on deposits, was 2.86%, up from 2.52% in 2021. What’s more the lender forecast the margin would rise above 3.2% in 2023.
So good news for Barclays but better for Lloyds and NatWest who don’t have the investment banking exposure of their rival.
Amidst the falling share price and declining profits it is easy to forget Barclays still made annual profits of £7bn, hardly on the breadline, and shareholders were rewarded with a hefty increase to the dividend to 7.25p. But a £0.5bn share buy-back left the City underwhelmed.
In the opinion of broker Jefferies it simply was “not good enough” while Sophie Lund-Yates, at Hargreaves Lansdown felt “given the group’s capital position, there’s definitely an argument that more money could be funnelled back to shareholders.”
Russ Mould suggested “In an environment where banks are one of the few beneficiaries of rising interest rates, one might have expected Barclays to dig deep and buy back a lot more shares.”
To top it all off was the always hot topic of pay and bonuses with Barclays still planning to fork out £1.2bn in pay-outs, down 3%, compared to the 15% fall in profits.
It also disclosed it paid £2.3mln last year to Jes Staley, the former Barclays CEO forced to stand down in the wake of investigations into his relationship with Jeffrey Epstein.
Perhaps it was a case of washing all the dirty laundry at once and Barclays of course can weather the financial pain. But as Sophie Lund-Yates said the “wider-reaching difficulties come from reputational damage.”
“The tolerance margin for a similar mistake is now very thin,” she suggested.
It’s hard to disagree. But whether this a sign of things to come as the banking results season kicks off is less certain. Many of the issues facing Barclays are self-inflicted and specific to its business while its areas of strength should benefit Lloyds and NatWest, not hinder.
It should also be pointed out that Lloyds, for example, has seen its share price rise 10% so far in 2023 so a fall today needs to be set in context.
But the knock to shares in Lloyds and NatWest today on the back of Barclays’ poor showing may prove to be unfair on the two more domestically focused lenders. Shares in Barclays were down 9.5% while Lloyds and NatWest fell 3.7% and 2.6% respectively.