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Barclays course corrects

First-half numbers were flattered by a better-than-expected credit impairment reversal
July 28, 2021
  • A fifth of first-half income came from a credit reversal
  • Return on equity expected to soften in the second half

Barclays (BARC) shareholders gave a joyous reception to accounts for the six months to June, after second-quarter net income of £2.32bn came in 45 per cent ahead of City forecasts.

As ever, revenues provided little indication of profitability. In the event, while Barclays’ loan book shrank 1.8 per cent to £346bn in the 12 months to June, interest income would have been up if the US dollar hadn’t softened against the pound by a tenth.

Instead, the big surprise came in the shape of a reversal of £1.1bn-worth of provisions, resulting in a credit impairment release of £742m. Compare that with the first half of 2020, when deteriorating economic conditions led Barclays to set aside £3.74bn for expected losses, and the clear message is that peak pandemic worries look to have passed.

The credit release, which made up a fifth of first-half net income, also turbocharged the return on tangible equity to 16.4 per cent, which is as about as good as an investor can hope for from a large UK-based bank in a low interest rate environment.

Together with the promise of a further £500m in share buybacks, one can hardly blame the market for pushing the stock up 4 per cent on sight of these numbers. But guidance for a return merely “above 10 per cent” suggests shareholders should prepare for some mean reversion in income generation.

Of course, this would be an improvement on the 2.8 per cent average return between 2016 and 2020. But assuming equity levels stay where they are, a 10 per cent full-year return only requires £800m in net income in the second half. Consensus forecasts peg 2021 earnings at 25p per share, too. Expectations are being managed on both sides. Hold.

BARCLAYS (BARC)   
ORD PRICE:176.3pMARKET VALUE:£30bn
TOUCH:176.3-176.5p12-MONTH HIGH:218pLOW: 89p
DIVIDEND YIELD:1.7%PE RATIO:7
NET ASSET VALUE:394pLEVERAGE:22.8
Half-year to 30 JunTotal operating income (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
202011.61.274.00nil
202111.34.9822.22.0
% change-3+291+455-
Ex-div:12 Aug   
Payment:17 Sep