To counter the margin pressure, Barclays announced plans for a share buyback of up to £750 million.
Barclays, the British multinational bank, has recently announced its Q2 2023 financial results, revealing expectations of earning less interest in its domestic division amid concerns over inflation and high-interest rates. The bank reported a net income of £1.3 billion ($1.68 billion) for the quarter, almost meeting market expectations but leaving some analysts disappointed. The results were influenced by slower momentum in the company’s investment banking division, which experienced a 3% revenue drop. Consequently, Barclays’ shares saw a 5.4% decline in early trade, highlighting investors’ apprehension.
Despite the challenges faced, there were some positive highlights for the quarter. Revenues for the domestic division and consumer and cards arm increased by 14% and 18%, respectively. The bank’s CET1 ratio, a measure of its solvency, improved to 13.8% from the previous quarter’s report of 13.6%, indicating a strong financial position. Additionally, operating costs dropped 6% compared to the previous year.
Customers Repay Mortgage Loans Using Their Savings
The company’s chief executive C. S. Venkatakrishnan told CNBC that the expected decrease in net interest margins is primarily driven by customers using their savings to repay their mortgage loans. While this may reduce the risk of payment defaults, it puts pressure on the bank’s margins. Despite this, Venkatakrishnan reassured that the UK consumer is cautious but not under financial strain.
The bank’s finance director, Anna Cross, also highlighted the growing pressure on Barclays’ UK business. Stubborn inflation, which is currently the highest among the G7 group of nations, coupled with higher interest rates, has prompted customers to prioritize debt repayment and increase their savings. As a consequence, the bank’s net interest margin in the domestic bank is expected to reach as high as 4.25% in the UK.
“Since we put out that full year guidance the facts have changed. Base rates were expected to peak at 4.25% in the UK and we are now sitting here at 5%, inflation is persistently higher and mortgage rates are higher,” she told Reuters.
Barclays to Buyback £750 Million Shares
To counter the margin pressure, Barclays announced plans for a share buyback of up to £750 million, a move welcomed by analysts at Jefferies. The financial experts referred to it as the “silver lining” in an otherwise modestly disappointing quarter for revenue.
Looking ahead, industry analysts expressed concerns about the bank’s future performance, especially given the squeezed margins in the UK as competition intensifies and households face rising cost of living challenges.
Meanwhile, other European banks are grappling with similar struggles in their investment banking units. Deutsche Bank recently reported that its investment bank revenues were expected to fall this year, adding to the broader concerns in the industry.