Barclays’ diversity gives bank resilience in the face of adversity

The lender has beaten forecasts with £2 billion profits in the third quarter, writes head of markets Richard Hunter.

On the whole, Barclays (LSE:BARC) has had a strong quarter which has offset some of the damage caused earlier in the year by the over-issuance of securities in the US, which is now largely recognised and therefore contained.

The impact of the over-issuance has seen some benefit from the positive impact of hedging against the loss, although the headline resulting write-off of £966 million has clearly dragged on profits.

However, it says much for the size and diversity of the group’s income streams when the headline numbers have for the most part comfortably withstood not only this oversight, but also an additional provision for potential bad losses. For the quarter, a further provision of £381 million brings the cumulative figure for the year to £722 million, which compares to a release last year of £622 million. Taken together, this is a significant swing of over £1.3 billion, yet the key metrics show improvement virtually across the board.

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The group’s diversified income streams have provided a strong tailwind in the quarter. Barclays UK has seen the benefit of increasing interest rates, traditionally a boon for lenders, while there has also been stronger activity within the Consumer, Cards & Payments unit. The Corporate & Investment Bank (CIB) has also weathered the storm well, with higher client markets activity offsetting the slowdown in investment banking caused by a deteriorating deals environment. In addition, the fact that Barclays has such a presence in the US has provided an additional tailwind from the strength of the US dollar against the pound, thus boosting the value of its earnings in the country when repatriated.

As such, the key metrics are moving in the right direction. Net Interest Margin improved from 2.53% to 2.78%, the cost/income ratio fell to 60% from 69% the previous quarter, the capital cushion remains robust at 13.8%, while the Liquidity Coverage Ratio remains extremely comfortable at 151%.

With a Return in Tangible Equity figure of 12.5% helping to improve the year to date numbers, the bank will be pleased with the momentum of the third quarter. Pre-tax profits rose to £1.97 billion compared to £1.86 billion the year previous, and ahead of expectations of £1.81 billion. Revenues were also ahead of forecasts, rising to £5.95 billion from £5.47 billion, and net profit jumped to £1.51 billion from £1.37 billion, ahead of the £1.2 billion forecast.

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The strength of the quarter repairs some of the dents from the year, but the outlook remains inevitably cloudy. The ongoing impacts of inflation, a possible global recession depending largely on the aggression of central bank rate rises and the deterioration of real incomes all have the potential to upset the apple cart further. The US over-issuance debacle could prompt some governance concerns, and the coming months are likely to provide further stern challenges.

The share price has tended to reflect the glass half-empty school of thought, having declined by 25% over the last year, as compared to a dip of just under 4% for the wider FTSE 100. This performance has overlooked the potential which Barclays carries, even though there are fires to be fought in the meantime. However, the general view remains positive, and the recently completed £500 million share buyback and a dividend yield of 4.2% are indicative of a generous shareholder return programme enabled by strong cash generation. As such, the market consensus of the shares as a buy is likely looking through today’s challenges to the potential rewards of tomorrow, with the benefits of diversity overcoming adversity.