Barclays shares punished for income miss and fewer deals 

After a solid performance in recent weeks, this mixed set of results has generated a mixed reaction, but sellers currently have the upper hand. Our head of markets runs through the numbers.

The benefits of Barclays (LSE:BARC)’ diverse business model continue to shine through, with a strong overall set of numbers offsetting any pockets of trading weakness.

Income for the second quarter was a prime example of this compensation. In the Corporate and Investment Bank (CIB), income fell by 10% to £3.2 billion, driven by lower client activity in global markets and a decrease in investment banking fees amid light corporate new issues. However, Barclays UK posted an income increase of 14% following strong Net Interest Income growth, while the Consumer, Cards and Payments (CC&P) delivered growth of 18% due largely to higher US card balances.

The net result was group income up 6% to £6.3 billion for the quarter which, while slightly shy of expectations, was a timely reminder of the group’s ability to see some units picking up the slack from others.

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The growing card balances and a generally pernicious economic environment also resulted in a further credit impairment figure of £400 million for the quarter, taking the half-year total to £900 million. Even so, the quarterly figure was much lighter than the £600 million which had been expected, underling the fact that while the bank saw the provision as prudent, there is no material underlying deterioration in debt defaults at present.

There was another bullish surprise with the announcement of a £750 million share buyback programme, which was significantly higher than the £575 million the market had been expecting. The largesse to shareholders was further evidenced by an increase to the dividend, increasing the projected yield to an attractive level of 4.7%.

In terms of the key metrics, the bank clearly remains in rude health and a 33% increase in Net Income Interest was a particular highlight. Elsewhere, the group Net Interest Margin rose to 4.06% from a previous 3.2%, Return on Tangible Equity came in at 13.2% for the half, and the Tier 1 ratio, or capital cushion, improved slightly from the first quarter to stand at 13.8%. Meanwhile, a cost/income ratio of 60% is comfortably within the bank’s own target of a low 60s number.

The strength of the US dollar versus sterling has worked for and against the bank. On the one hand, it has had a beneficial impact when translating income and profit back to sterling, but it also works against the group in terms of operating expenses and impairment charges. Even so, the overall picture for the group was largely unaffected. Group income for the half rose by 9%, with pre-tax profit showing a healthy 22% bounce to stand at £4.6 billion.

In terms of outlook, and while Barclays remains mindful of a mixed macroeconomic environment, guidance was reiterated, with a Return on Tangible Equity for the year expected to exceed 10% and for Net Interest Margin within Barclays UK, for example, to remain fairly stable at 3.15%. Previous regulatory charges relating to the over-issuance of securities are being consigned to the history books, alleviating some of the pressure which these significant costs brought.

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Overall, the numbers are solid if mildly uninspiring, with the market currently in the mindset of punishing any consensus misses. The total income number is light of expectations and the CIB result, hit by lower trading and deal-making, is a blot on the overall picture, leading to a weak open for the shares. This adds to the malaise of the last six months where a generally dour backdrop and the banking turmoil elsewhere has weighed on the sector as a whole.

Even so, over the last year the price has added 5%, slightly outpacing a gain of 4.5% for the wider FTSE100 and, while the initial reaction to the numbers is disappointing, the longer-term market consensus of the shares as a 'buy' continues to reflect the strength and to some extent insurance which the Barclays model brings.