A view of Canary Wharf financial district in London.
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LONDON – Barclays shares fell on Tuesday as investors weighed the prospect of cost-cutting charges, pressure on domestic interest margins and weak performance in previously strong divisions.
The bank reported net profit of 1.27 billion pounds ($1.56 billion) for the third quarter, slightly above expectations as strong results in its consumer and credit card businesses offset weak investment banking revenues.
Analysts polled by Reuters had a consensus forecast of £1.18 billion, down from £1.33 billion in the second quarter and £1.51 billion for the same period in 2022.
Below are other highlights for this quarter:
- The CET1 ratio, a measure of banks’ financial strength, was 14%, up from 13.8% in the previous quarter.
- The return on tangible equity reached 11%, and the bank aims to achieve more than 10% in 2023.
- The group’s total operating expenses fell by 4% year-on-year to £3.9bn, as inflation, business growth and investments were offset by “efficiency savings and lower litigation and conduct fees”.
Barclays CEO CS Venkatakrishnan said the bank “continued to manage credit well, remained disciplined on costs and maintained a strong capital position” against a “mixed market backdrop”.
“We see further opportunities to enhance shareholder returns through cost efficiencies and disciplined capital allocation across the group.”
He added that Barclays would set out capital allocation priorities and revised financial targets in an update to investors alongside full-year earnings.
Barclays Corporate and Investment Bank (CIB) saw income fall 6% to £3.1bn, as the bank cited lower client activity in global markets and investment banking fees.
Revenues in the traditionally strong fixed income, currency and commodities trading division fell 13% as market volatility moderated, leading to lower trading volumes.
This was mostly offset by a 9% increase in revenue from its Consumer, Cards and Payments (CC&P) business to £1.4 billion, reflecting higher balances on US cards and the relocation of its Wealth Management and Investments (WM&I) division from Barclays in the UK.
The bank did not announce any new capital returns to shareholders after announcing a £750m share buyback in July.
Fees reduce costs in the future
Barclays hinted at significant cost cuts to be announced later in the year, noting in its earnings report that the group is “evaluating actions to reduce structural costs to help increase future returns, which could result in material additional charges in the 423rd quarter.”
The cost-to-income ratio in the third quarter was 63%, but the bank set a medium-term target of less than 60%.
It is worth noting that Barclays Bank lowered its net interest margin forecast for the British bank to a range of 3.05% to 3.1%, down from the previous guidance of about 3.15%.
The bank had warned in second-quarter earnings that it expected lower interest rates in its UK division, with net interest margins at its local bank under pressure due to increased competition for savers’ deposits amid a difficult period for UK household finances.
The bank’s shares fell as much as 6.5% by 9:16 a.m. in London, as market participants balked at the prospect of cost action and margin pressure.
Danny Hewson, head of financial analysis at the stock brokerage, said: “Net interest margin is the metric by which banks are judged, so it is not surprising to see Barclays heavily penalized for cutting guidance here even if third-quarter earnings are above guidance.” AG Bell.
“It is not a particularly palatable message for shareholders to hear that the business will be less profitable. While banks have been seen as beneficiaries of higher interest rates, and may have been for some time, competitive and regulatory pressures to match increases in cost” Borrowing at Interest Rates Offering cash over deposits means that this advantage is not proven to last for long.”
‘Mixed set of results’
John Moore, chief investment officer at RBC Brewin Dolphin, said that despite beating expectations at a key level, Barclays had produced a “real mixed set of results” that reflected an “increasingly challenging backdrop”.
“Overall sentiment has deteriorated, on the back of U.S. regional banks struggling with lower-than-expected net interest margins and issues such as Metro Bank’s well-publicized problems,” Moore said in an email on Tuesday.
“Market conditions have also not been great for Barclays’ investment banking division, where deal activity has been relatively low. However, its other banking operations are largely resilient – particularly its consumer and credit card businesses – and with capital to invest, Barclays could “Benefiting while some of its smaller peers are struggling in the current environment.”
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