ENGLAND — On Tuesday, investors reduced their holdings in Barclays as they considered the possibility of cost-cutting measures, pressure on domestic interest margins, and subpar results in previously strong divisions.
For the third quarter, the bank recorded a net profit of £1.27 billion ($1.56 billion), slightly exceeding forecasts as strong earnings in its consumer and credit card divisions made up for declining revenues from its investment bank division.
A consensus estimate of £1.18 billion was reached by analysts surveyed by Reuters, down from £1.33 billion in the second quarter and £1.51 billion for the same time in 2022.
A gauge of a bank’s financial health, the CET1 ratio, was up from 13.8% in the previous quarter to 14% today.
The bank set a target of greater than 10% for RoTE in 2023, which was 11% in 2018.
Inflation, company expansion, and investments were offset by “efficiency savings and lower litigation and conduct charges,” which resulted in a 4% year-over-year decrease in the group’s overall operating expenses to £3.9 billion.
In spite of a “mixed market backdrop,” Barclays CEO C.S. Venkatakrishnan said that the bank “continued to manage credit well, remained disciplined on costs and maintained a strong capital position.”
“We see additional opportunities to increase shareholder returns through cost savings and disciplined capital allocation across the Group,” the statement continued.
In an investor report that will be released alongside its full-year profits, Barclays will outline its capital allocation strategies and revised financial targets.
Income at Barclays’ corporate and investment bank (CIB) fell by 6% to £3.1 billion, as a result of decreased customer activity in international markets and investment banking fees, according to the firm.
The normally strong fixed income, currency, and commodities trading segment saw a 13% decline in revenue as market volatility subsided and trade volumes fell.
A 9% revenue growth to £1.4 billion in its consumer, cards, and payments (CC&P) business, which was largely offset by the transfer of the wealth management and investments (WM&I) division from Barclays U.K., and higher balances on U.S. credit cards, offset this.
After announcing a £750 million share buyback in July, the bank did not disclose any additional capital returns to shareholders.
Ahead are cost-cutting charges
In its earnings release, Barclays hinted at significant cost cutting that will be disclosed later in the year, saying that the company is “evaluating actions to reduce structural costs to help drive future returns, which may result in material additional charges in Q423.”
In the third quarter, the cost-income ratio was 63%, but the bank has a medium-term aim of below 60%.
Notably, Barclays reduced its prediction for the U.K. bank’s net interest margin from previous guidance of approximately 3.15% to a range of 3.05% to 3.1%.
The bank had issued a warning in its second-quarter earnings that it anticipates earning less income in its U.K. business, with net interest margins in its domestic bank under pressure due to greater competition for savers’ deposits in the midst of a challenging time for household finances in the U.K.
As market participants reacted negatively to the possibility of cost actions and margin pressure, the bank’s shares fell as much as 6.5% by 09:16 a.m. in London.
“Net interest margin is the metric the banks are judged on so it is not a surprise to see Barclays heavily punished for downgrading guidance here even if profit for the third quarter was ahead of guidance,” commented Danni Hewson, head of financial analysis at stockbroker AJ Bell.
“Telling stockholders that a company will be less lucrative is never a very pleasant message. Although higher interest rates were initially thought to help banks, and they may have in the short term, pressures from the market and regulations to match rising borrowing costs with rates paid for funds on deposits have prevented this benefit from persisting.
A’mixed set of results‘
Although headline results exceeded expectations, according to John Moore, senior investment manager at RBC Brewin Dolphin, Barclays had provided a “real mixed set of results” that revealed a “increasingly challenging backdrop.”
Moore wrote in an email on Tuesday, “Sentiment has generally soured, as a result of U.S. regional banks struggling with lower than expected net interest margins and issues such as the well-publicized problems of Metro Bank.”
“Deal activity has been somewhat low, and market circumstances have not been excellent for Barclays’ investment banking sector. However, given that its other banking activities are generally resilient, particularly its consumer and credit card business, Barclays may benefit if some of its smaller competitors struggle in the current market.