Barclays is preferred UK bank share after this profits beat

Despite some pockets of weakness among the numbers, the strength of Barclays (LSE:BARC)’ diversified model has won through, resulting in a mostly pleasing performance.

Revenues in the second quarter to 30 June of £6.3 billion were above the expected £6.16 billion, leading to a half-year number of £13.3 billion, itself down by 2% on the previous year. The trend was echoed at the pre-tax profit level, where a second-quarter figure of £1.9 billion exceeded the estimated £1.56 billion, but where the half-year number of £4.2 billion was 8% lower than the corresponding period.

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Among the culprits for the lower numbers were mortgage margin pressure and adverse deposit dynamics as customers sought higher rates elsewhere, although both of these improved in the second quarter to hopefully establish a more positive direction of travel.

Barclays' US Consumer Bank saw income increase by 5% to £1.68 billion, largely as a result of higher credit card balances, although this came with something of a caveat. This rise in effectively unsecured lending inevitably led to a small but containable increase in credit defaults, of which the bank is acutely aware. It has therefore taken the decision to increase the overall level of its impairment charge, lifting the group total to £900 million, reflecting this possibly higher level of delinquencies in US cards.

At the Investment Bank, there was rather better news as income rose by 10% in the second quarter to £3.02 billion. Recent strong numbers from the likes of The Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS) in the US were expected to read across to Barclays, and higher fee income is a welcome development.

There was a weaker performance within FICC (fixed income, currencies and commodities) where income fell by 14%, but more positively the equities business saw a 24% rise in income. This is significant to the group’s overall performance, since the investment bank accounts for around half of total group revenue. 

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The key metrics are, for the most part, in good shape, as had largely been expected. A capital cushion of 13.6% was maintained, while the Return on Tangible Equity (ROTE) number exceeded the bank’s on target of 10%, coming in at 11.1% and still on target for a 2026 level in excess of 12%.

The cost/income ratio was a healthy 62%, with cost savings of £400 million for the six months still expected to hit £1 billion for the year as a whole. Improving deposit movements and interest rates being higher for longer than had been expected improved Net Interest Income, where the bank upgraded its full-year guidance from £10.7 billion to £11 billion.

The group is also maintaining its stance on shareholder returns, and for this period a new £750 million buyback was announced, alongside a marginal increase to the dividend which gives a projected yield of 3.5%. Between this year and 2026, Barclays is estimating an extremely ambitious £10 billion of returns, which are increasingly likely to be skewed towards buybacks rather than a progressive dividend policy.

In terms of corporate activity, the group is still in the process of repositioning its portfolio. The Italian mortgage book is being sold at a loss of some £225 million, and the German consumer finance business for a loss of £20 million. Meanwhile, the acquisition of Tesco Bank is expected to complete in November, adding a further string to Barclays’ UK income bow. 

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While the shares reacted positively to the update, the move was perhaps tempered by much of the good news already being in the price. A stellar six months has seen the share price rising by 58%, leading to a gain of 51% over the last year, as compared to a rise of 9.2% for the wider FTSE 100.

Barclays is a group with deep pockets and a diversified business model, and the longer-term outlook remains one which continues to attract investors. Indeed, the market consensus of the shares as a 'buy' has recently edged past NatWest Group (LSE:NWG), such that Barclays is currently the preferred play in the sector.