Barclays profits boom as Q4 beats forecasts

A stable, dependable and progressive set of numbers such as these would normally fire the share price ahead, but given Barclays (LSE:BARC)’ recent run the height of expectation has turned into a temporary headwind.

At a group level, pre-tax profit of £8.1 billion for 2024 was 24% higher than the corresponding period and in line with expectations. Feeding into the number were revenues of £26.8 billion, a 6% increase and ahead of estimates of £26.5 billion, with fourth quarter contributions for both profit and revenues comfortably ahead of predictions.

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Meanwhile, Net Interest Income (NII) of £11.2 billion exceeded the group’s previous guidance and included a contribution from Barclays UK of £6.5 billion, where a day one boost of £600 million came from Tesco Bank, alongside a strong structural hedge performance which more than offset any mortgage margin compression.

The key metrics also showed signs of significant strength and improvement on the whole. The Return on Tangible Equity (ROTE) came in at 10.5%, higher than the target level of 10% and up from 9% the previous year. A robust capital cushion or CET1 ratio of 13.6% is also in place, with the direction of the cost/income ratio impressive.

Cost savings of £1 billion were achieved over the course of the year, leading to a number of 62% as compared to 67% in the corresponding period. Impairment charges ticked marginally higher to £2 billion from £1.9 billion, partly due to a £200 million charge arising from the Tesco Bank integration.

Much of the optimism leading into these numbers was an anticipation of the performance of the group’s three largest units. The Investment Bank, which is for the most part a US division, accounts for 44% of group revenues, Barclays UK 31% and the Barclays US Consumer Bank 12%. The recent strength of sterling against the US dollar is unusual in that the group is reporting a currency headwind as opposed to the usual tailwind it announces. However, this is something of a double-edged sword in that this sterling strength negatively impacted revenue and profits, while having a positive effect on impairment charges and total operating expenses, especially Stateside.

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As had been hoped, the recent strength of the bank sector reporting season in the US has indeed read across to Barclays’ US Investment Bank, where higher overall income rose by 7% to £11.8 billion, largely driven by a 12% improvement in deal making and fee income generally, with a fourth quarter jump of 28% helping the numbers along.

At the US Consumer Bank, income grew by 2% despite the currency headwind of the sterling/US dollar relationship, with another increase in credit card balances. However, this increase continues to come with something of a caveat, since the rise in effectively unsecured lending inevitably led to a small but containable increase in credit defaults, of which the bank is acutely aware and has made provisions.  

Barclays is also maintaining its stance on shareholder returns, with the announcement of a new £1 billion share buyback programme and a modest increase to the dividend giving a projected yield of 2.7%. While the yield itself is somewhat pedestrian (and also partly reduced due to the recent share price strength), the group had previously guided that its shareholder returns would be skewed more towards buybacks rather than a progressive dividend policy and has maintained its ambitious aim of £10 billion of returns between 2024 and 2026.

Indeed, the momentum has spilled over into revised and improved outlooks. A ROTE of around 11% in 2025 is expected to rise to more than 12% in 2026, alongside projections of Net Interest Income of £12.2 billion for this year (including £7.4 billion from Barclays UK) and total group income of £30 billion for next year. In the shorter term, an additional £500 million of savings should shave the cost/income ratio to 61%, reducing to the high 50s range another year out.

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Given the high expectations for some positive surprises leading into the numbers, some profit taking was perhaps inevitable at the opening of trade. However, this does little to detract from the fact that the share price has risen by 115% over the last year, as compared to a gain of 17% for the wider FTSE100 and has already gained more than 10% this calendar year.

The tailwinds of the group’s structural hedge, alongside interest rates which could be staying higher for longer given inflation concerns are a dual benefit which could continue to propel profits. Indeed, underpinned by the group’s financial strength and its geographical and business diversity, there is little to suggest that the current market consensus of the shares as a strong buy will be troubled, despite today’s temporary share price glitch.