After Barclays Warned of Cost-cutting Charges in the Fourth Quarter, the Stock Declined 6.5%

Barclays saw a decline in its shares on Tuesday as investors evaluated the potential impact of cost-cutting measures, pressure on domestic interest margins, and underperformance in previously strong sectors.

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For the third quarter, the bank reported a net profit of £1.27 billion ($1.56 billion), slightly surpassing expectations. This was due to robust results in its consumer and credit card divisions, which compensated for a decrease in revenues from the investment banking sector.

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Analysts surveyed by Reuters had anticipated a consensus forecast of £1.18 billion, down from £1.33 billion in the second quarter and £1.51 billion for the same period in 2022.

Here are other key highlights from the quarter:

• The CET1 ratio, a measure of the bank's financial strength, increased to 14% from 13.8% in the previous quarter.
• The Return on Tangible Equity (RoTE) was 11%, with the bank aiming for more than 10% for 2023.
• Group total operating expenses decreased by 4% year-on-year to £3.9 billion, as efficiency savings and lower litigation and conduct charges offset inflation, business growth, and investments.

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Barclays' CEO, C.S. Venkatakrishnan, expressed satisfaction with the bank's management of credit, cost discipline, and robust capital position, despite a "mixed market backdrop." He emphasized their commitment to enhancing shareholder returns through cost efficiencies and disciplined capital allocation.

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The bank plans to outline its capital allocation priorities and revised financial targets in an investor update accompanying its full-year earnings.

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Barclays' corporate and investment bank (CIB) experienced a 6% decrease in income to £3.1 billion. This drop was attributed to reduced client activity in global markets and investment banking fees. Revenue in the traditionally strong fixed income, currency, and commodities trading division declined by 13% due to moderated market volatility and decreased trading volumes.

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However, a 9% revenue increase was noted in its consumer, cards, and payments (CC&P) business, reaching £1.4 billion. This gain was a result of higher balances on U.S. cards and the transfer of the wealth management and investments (WM&I) division from Barclays U.K.

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Barclays did not announce any new plans for returning capital to shareholders, following the previous £750 million share buyback announcement in July.

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Cost-cutting plans aheadBarclays hinted at significant cost-cutting initiatives to be unveiled later in the year. The earnings report mentioned that the group is evaluating actions to reduce structural costs, which might lead to substantial additional charges in Q4 2023. The cost-income ratio in the third quarter was 63%, and the bank aims to achieve a medium-term target of below 60%.

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Notably, Barclays revised its net interest margin forecast for the U.K. bank to a range of 3.05% to 3.1%, down from the previous guidance of around 3.15%. This revision was due to expectations of reduced interest income in its U.K. division, with domestic bank net interest margins under pressure from increased competition for savers' deposits and challenging household finances in the U.K.

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The bank's shares fell by as much as 6.5% in early London trading as investors reacted to the news of potential cost-cutting measures and margin pressure.

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Danni Hewson, head of financial analysis at stockbroker AJ Bell, noted that net interest margin is a critical metric for banks, and Barclays' downgrade in guidance, despite exceeding profit expectations for the third quarter, was met with market concern. The competitive and regulatory pressures to match borrowing costs with deposit rates have limited the benefits of higher interest rates for banks.

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John Moore, senior investment manager at RBC Brewin Dolphin, described Barclays' results as a "mixed set," reflecting a challenging environment. Despite beating headline expectations, he acknowledged the difficult conditions faced by regional U.S. banks and the lower-than-expected net interest margins. Moore noted that while the investment banking division faced challenges, other segments, particularly consumer and credit cards, remained resilient, positioning Barclays as a potential beneficiary as smaller peers struggle in the current environment.

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