Shares in Barclays (BARC) slumped 5.4% to 178.5p despite posting first quarter profits well above market forecasts. Barclays, the last of the big four UK banks to report, recorded pre-tax profits of £2.4 billion for the first three months to 31 March 2021.
That compared with £923 million in the same quarter last year and well ahead of consensus estimates of £1.76 billion.
Most of the gains were due to a better performance by the corporate and investment banking business, which generated income of £3.6 billion, similar to last year thanks to big gains in equities trading and corporate advisory, such as IPOs.
COSTS SURPRISE
Investors seemed to take exception to both the bank’s 35% slump in fixed income, currencies and commodities income, and soaring pay for the bank’s top traders, which increased Barclays’ overall cost base by 10%.
Chief executive Jes Staley defended the issue of pay on the basis that the investment bank had helped almost treble the group’s return on tangible equity to 14.7%. Staley believes that compensation is a ‘controllable’ cost rather than a structural one and can be dialed back in future if warranted.
The bank also seemed to get no credit for taking a cautious line on potential bad loans. Barclays put aside a nominal £55 million of provisions rather than releasing some of its nearly £9 billion pile of existing impairments.
The bank said it made no material single name wholesale loan charge, having dodged both the Archegos and Greensill scandals, and had seen ‘limited portfolio deterioration’ across its loan book.
ONGOING HEADWINDS
While the bank said it expected continued headwinds this year from a subdued market in unsecured lending and low interest rates, Staley was upbeat about the UK economy: ‘From our spend data, which captures UK economic activity across our cards and acquiring businesses, we are already seeing encouraging early signs of recovery in some sectors, including those hit hardest by the crisis.’
Jefferies analyst Joseph Dickerson kept his buy recommendation and his 296p price target on Barclays thanks to its income and credit cost performance, which he expects to continue this year.
Strength in the investment bank and room to write back loan-loss provisions are further ‘drivers of upside to consensus’, says Dickerson.
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