Barclays grapples with an indifferent year

The market’s verdict on Barclays’ (BARC) full-year results was swift and brutal after it became clear that the bank’s chronic inability to have all its operating divisions prospering at roughly the same time again held back its overall performance. Barclays’ traders can be forgiven an uneven year as, despite ideal conditions for volatility trading, targets were missed as clients pulled funds. The problem was that investment banking fees did not increase to take up the slack. Therefore, it looks very much like the bank is trapped in its traditional dilemma of mediocre performance in one division holding back any improvement in another – a situation that chief executive CS Venkatakrishnan, known as Venkat, had vowed to change.

Barclays' basic structural issues were obvious in how profitability progressed. After reaching £4.28bn in the second quarter, the bank’s fee income – which is heavily dependent on trading and investment banking – had fallen to £3.06bn by the final quarter of 2022. In fact, fees generated by investment banking on its own were just £480mn for the final quarter. By contrast, the UK domestic banking business enjoyed a champagne performance as rising rates helped to lift the bank’s net interest margin by 48 basis points to 3.1 per cent between the beginning and the end of the reporting period.

However, the bank did see some compression in its net interest margin, which is why the outlook for 2023 was held at 3.2 per cent, instead of the 3.28 per cent that consensus had forecast. This may be related to it not swapping out some of its fixed-rate assets to floating rate quickly enough, thereby depressing the overall margin for the year. Barclays will at least benefit from costs staying down in relation to total income – the cost ratio in Barclays UK, for instance, was significantly better at 60 per cent (2021: 68 per cent). Management also claims to see a return on tangible equity of 10 per cent for this year.

Overall, it was a year to forget for Barclays investors; the final legal bill for its various mishaps, including the overissuance of securities in the US, comes to £1.9bn, for instance. In the meantime, Barclays' £500mn buyback looks stingy when compared with rising payouts at its European competitors. Overall, the forward consensus of just six times 2023 EPS forecasts looks well-earned. Hold.

Last IC view: Hold, 156p, 28 Jul 2022