Barclays PLC (LON:BARC) profits fell by more than a third in the first quarter of 2020 as a big charge in anticipation of coronavirus (COVID-19) loan losses offset bumper trading for its investment bank.
Income in the first three months of the year increased 20% year on year to £6.3bn as UK revenues decreased 4% due to lower interest rates but the investment banking arm enjoyed a 44% surge in fees, with the Markets business having a record quarter.
Profit before tax tumbled 38% to £913mln as costs were stable but the lender ramped up its credit impairment charges to £2.1bn, including £1.2bn from the potential fallout from the COVID-19 pandemic and a sustained period of low oil prices and £405mln for wholesale loans.
The credit impairment charge “reflects our initial estimates of the impact of the COVID-19 pandemic” said chief executive Jes Staley.
“The strength of Barclays lies in our diversification by business, geography and currency, which allows us to remain resilient through the developing economic downturn,” he added.
With more than 6mln customers and clients currently paying no personal overdraft or business banking charges due to the government’s pandemic measures, as well as low interest rates, the Barclays UK arm’s reduction in net interest income resulted in a lower net interest margin of 2.91% versus 3.18% a year ago.
Capital levels remained strong, with a CET-1 ratio only slipping to 13.1% from 13.8% at the end of December.
Having announced earlier this month that it would scrap its dividend and suspend share buybacks following pressure from the Bank of England, Staley said the board “will decide on future dividends and its capital returns policy at year-end 2020”.
Shares in the bank were up more than 7% by mid-morning on Wednesday to 104.86p, where they are still down 43% since the start of the year.
Neil Wilson at Markets.com said the rise in revenues was similar to US banks, “but this offset may be a one-off for banks as volatility returns to more normal levels”.
Richard Hunter at Interactive Investors noted that the £1.2bn impairment changes is predicated on a sharp contraction of GDP and a significant upturn in unemployment in both the UK and the US, “but does not detract from the bank’s willingness to lend, as evidenced by some of its immediate steps such as its activity through the Covid Corporate Financing Facility and £740mln of Coronavirus Business Interruption Loans”.
He added: “Of course, the strongest challenges are yet to come, with the second quarter likely to herald reduced customer activity, a potential increase in bad debts, generally recessionary economic environments and all at a time when historically low interest rates continue to crimp margins.
“From an investment perspective, the loss of the dividend (previously yielding around 10%) is a significant loss to income-seekers, and signs of some weakening trends in the Credit Card and Payments unit will need to be monitored and addressed.”
Analysts at Hargreaves Lansdown said that while Barclays has seen increased interest income from a sudden spike in lending, particularly in corporate lending as companies look to increase liquidity in a tough environment, this “causes some headaches on the balance sheet” as this requires an increase in capital requirements.
“Despite growing its total capital available this quarter, Barclays’ capital ratios have actually declined because of the increased lending, an interesting illustration of the dilemmas facing the banking sector. The government’s decision to underwrite large portions of Coronavirus loans should help to keep the cash flowing out the door to companies, but it’s something to keep an eye on.”
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