Like many other UK banks, the earnings surprise was offset by negative equity adjustments. The top line continued to enjoy supportive CIB activities which offset the ongoing impact of the pandemic on the consumer finance business. The earnings surprise could have proved to be stronger if the group had decided to recover all the excess provisioning.
Companies: Barclays PLC
The lockdowns’ impact on consumer spending was mitigated by robust mortgage activity and, above all, strong investment banking businesses supported by ongoing supportive market conditions and market share gains in both FICC and equities. This year, the extent of the profitability recovery will largely depend on the pace at which the cost of risk will normalise.
As expected following the US banks’ releases, Barclays’ third quarter results saw a sharp reduction in provisions build-up while the emergence of delinquencies has been delayed by the State’s supporting measures. Management continues to expect a reduction in the cost of risk next year. It remains to be seen if this guidance is capable of withstanding new lockdowns or a no-deal Brexit.
The group continued to opportunistically take advantage of its CIB division’s performance to front-load pending credit losses. The third quarter should mark the beginning of a normalisation in the revenue mix and the cost of risk assuming no change in the macro-economic scenario retained by the group.
The strong CIB performance enabled the group to build up reserves in anticipation of the COVID-19 impact with relatively limited damage. Last but not least, management does not expect the first quarter impairments to repeat at the same level over the next three quarters, forecasting full-year credit charges significantly below the level returned by EBA’s stress tests.
Although the quarterly operating performance was on track, notably thanks to cost savings, it seems that asset quality has deteriorated markedly. The tangible book value was impacted by heavy adjustments but this was offset by reduced capital usage.
The quarter was marked by record PPI-related charges, fortunately absorbed by a favourable RWA model change. On the other hand, the quarter showed resilient operating trends. The warning over 2020 seems already factored into consensus expectations.
The first half operating trends failed to confirm the planned top-line recovery targeted by management. On the positive, capital generation enjoyed a boost from non-P&L items, including reduced capital consumption.
This set of quarterly results was even more important than the group holding a particularly interesting AGM next week. Management has already bolstered its defences against Mr Bramson who is targeting a seat on the Board. We consider that the first quarter performance of the scrutinised CIB division proved relatively resilient, continuing to show good momentum vis-à-vis peers and strong cost control.
The group posted encouraging fourth quarter results in a particularly challenging context. This enabled management to reiterate its objectives for 2019 and 2020.
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