November 30, 2023

Investment Banking

Let Your Investment Banking Do The Walking

Barclays Unveils New Buyback as Investment Bank Misses Estimates

(Bloomberg) — Barclays Plc shares fell after the lender cut its guidance for net interest margin at its retail bank, a potential drag on earnings as rate rises come to an end.

The UK lender reduced the net interest margin outlook for its domestic unit for this year to 3.15%, down from 3.2%, reflecting customers chasing better yields to cope with higher rates “and further macroeconomic developments.”

Finance Director Anna Cross said customers were reacting rationally to the highest rates in 15 years, with more than a quarter of mortgage customers overpaying on their loans. She said there’s “not a huge amount of growth in the market but it is extremely active” as borrowers hunt for the cheapest deals possible. 

Shares in the lender were down 4.2% at 12:04 p.m. in London even as Barclays said it would buy back a further £750 million ($973 million) of stock. 

The disappointing quarter adds pressure on Chief Executive Officer C.S. Venkatakrishnan’s work to improve the bank’s lagging share price. Benefits from rates are peaking while the investment bank, which consumes the most capital, posted lower-than expected results.

Trading revenue fell 41% on a year ago to £1.75 billion. Revenue from the bank’s flagship fixed-income trading division fell 22% to £1.2 billion while equities trading revenue fell 60% to £563 million. This includes the impact of a securities error a year ago.

Still, the group’s second-quarter attributable profit rose 24% to £1.33 billion, beating estimates of £1.28 billion by six analysts compiled by Bloomberg. The UK business reported a 14% rise in total income compared to a year ago.

Banks around the world are facing rate hikes at varying paces, with many converting the increases into higher margins. This week, Banco Santander SA beat estimates as the Spanish market became its top profit maker thanks to rising interest rates in the Euopean Union. The largest banks in the US are also benefiting. 

UK lenders, who have seen 13 rate rises from the Bank of England so far, have come under increasing pressure from politicians and regulators to pass more of this windfall to their customers. 

Even if rates continue to rise, Barclays is unlikely to see further improvements in net interest income as clients become more sensitive to rate changes on their deposits, Cross said on an analyst call. 

British lenders are also coming under scrutiny over “debanking” customers, after NatWest Group Plc dropped Brexit campaigner Nigel Farage. Venkatakrishnan said the bank supported government work to reform the rules on banking access. “We feel really really strongly that people should not be excluded on the basis of personal or political beliefs,” he told reporters. 

What Bloomberg Intelligence Says:

Barclays’ top-line estimates are likely to decline following the lender’s surprise full-year 2023 net interest margin guidance cut to 3.15%, compared with more than 3.2% previously and consensus at 3.23%, on changing customer behavior, and a 22% dip in FICC revenue in the corporate bank. The cut and FICC decline more than offset modest beats on expenses (2%) and cost of risk in 2Q, and take the shine off a new £750 million share buyback.

— Philip Richards, BI banking analyst

Barclays’ Margin Cut to 3.15%, Revenue Miss Bode Poorly: React

Barclays is the third major European investment bank posting results after Deutsche Bank AG posted a smaller-than-feared decline in trading gains on Wednesday and BNP Paribas SA flagged in debt trading earlier Thursday. Wall Street banks have already reported an aggregate 13% drop in fixed income revenue from a year earlier as the volatility stirred by last year’s invasion of Ukraine trailed off. 

The bank’s revenue from advising on corporate deals and capital issuance also plunged 15%, in line with the broader market. Barclays has recently announced a flurry of senior banker hires after an exodus of managing directors in the US and parts of Europe. 

Strategy Questions

The lender’s latest share buyback is larger than analysts were expecting and follows on from a £500 million program that concluded in April. The company’s leadership had signaled moves to buy back its depressed stock earlier this year. 

Barclays recently hired consulting firm Boston Consulting Group to look at ways to improve its share price performance and has also started the sale of its German consumer finance business, which could pave the way for further disposals. 

Venkatakrishnan confirmed the German sale process to analysts, adding it will free up some capital. “It’s a nice business,” he said.

He added that he wanted to grow fee-generating businesses that don’t require too much capital, mentioning the transaction business within the investment bank as well as the financing business. Barclays wants to expand its cards business too, he noted, but would also like to improve the unit’s capital usage and be “growing in a more efficient way.”

Analysts asked numerous questions about the direction of the share price, which has fallen by about 17% over the past five years and dragged the bank’s market price to less than half of its book value. 

“Are we not approaching the point now after perhaps five or ten years of this strategy where we start to think, doesn’t something more radical need to happen to actually start closing the gap?” asked Edward Firth, analyst at KBW.

Other highlights from Barclays’s earnings in the quarter include:

  • CET1 ratio of 13.8%
  • First half dividend of 2.7 pence per share
  • Reiterated earlier target of return on tangible equity of more than 10% in 2023

(Updates with comments from analyst call, context on global rate rises from eighth paragraph.)

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