Barclays beats expectations, but loan losses rise

It’s been a difficult time for UK banks this year, though Barclays share price has held up much better than its peers.

Having seen US banks cut back their loan loss provisions in Q3 we’ve seen Barclays do the same thing this morning.

These loan loss provisions were one of the most notable characteristics of the numbers that we saw in Q2, particularly in the context of the impact the economic slowdown the coronavirus pandemic had on bank profit margins, as well as the rise in non-performing loans.

This could get worse in the coming months as lockdown measures get tightened in various local areas, and unemployment levels start to rise. This is why it was a little surprising to see US banks slow sharply the level of their Q3 provision when they reported a couple of weeks ago.

The big question as we see the latest numbers from UK banks is whether they go down that route, or continue to shore up their own provisioning ahead of what is likely to be a difficult six months for the UK economy.

This morning’s Q3 numbers from Barclays have given us an early indication into their thinking on this, as the bank set aside £608m in respect of this for Q3, slightly lower than expected, bringing the total year to date to £4.3bn, while we also saw an increase in PPI provision of £1.4bn.

This £608m comes on top of the £3.7bn set aside in the first half of this year, a fall of 63% from Q2, with the bank saying that the second half of the year in terms of provisions is likely to be lower than that seen in H1. In terms provision for credit card debts the provision was also sharply lower with £183m in that total of £608m.

On the plus side Barclays does have other revenues streams away from retail banking which it has continued to reap the benefits from.

In Q2 these areas outperformed with investment banking revenue up by 31% from the previous year, with fixed income seeing a notable improvement. First half profits came in at £695m.

In Q3 a similar pattern has played out with the bank posting Q3 attributable group profits of £611m, with investment banking outperforming, however FICC was a little disappointing in terms of income, seeing a sharp drop to £1bn, from £1.47bn in Q2.

The equities business improved to £691m with total income in the corporate and investment bank seeing a fall from £3.3bn in Q2 to £2.9bn in Q3, though this was still above expectations of £2.6bn.

Operating costs were slightly higher at £3.39bn, but have remained fairly steady throughout the year on a quarterly basis.

Net interest margin was stable at 2.51%, rising slightly from 2.48%, with the bank saying that it was prepared for negative interest rates, even if they preferred not to see them. CEO Jes Staley seemed to think the prospect of negative rates wasn’t likely in the UK, which is surprising given recent briefings by the Bank of England. Maybe Jes Staley knows something we don’t?

All in all, the tone from Barclays was more positive despite the bleak outlook for the UK economy over the winter, with the bank saying it would provide an update on the dividend at its full year numbers, in three months’ time.  

In terms of Q4 Barclays expressed uncertainty about the outlook but said the costs were likely to continue to be flat versus 2019.

With all the questions being raised about the future of CEO Jes Staley these numbers reinforce the case for keeping the investment bank operation intact, and helping to support the business in these difficult times.

This is one major advantage that Barclays has over Lloyds and NatWest Group, who report next week, in that continued outperformance in their investment banking division is likely to help them ride out the current uncertainty much better, and is already starting to be reflected in their share price.