Barclays Appears To Have Turned A Corner, But Brexit Is Likely To Weigh On Profits
Barclays gave investors a welcome surprise with stronger-than-expected results for the second quarter of 2018 earlier this week. While the British banking giant’s continued focus on investment banking operations helped it make the most of upbeat securities trading activity over the period, Q2 2018 marks a rare quarter for the bank since the downturn when its results were not marred by any major one-time legal or restructuring costs. The bank’s Q2 results, therefore, are representative of the cost structure investors can expect from its revamped business model going forward. Taking into account the headwinds faced by its core personal banking and card business in the U.K. in the wake of Brexit, Barclays’ cost-to-income ratio of 59% for the quarter indicates that the bank has finally put all its legacy issues behind it.
We have summarized Barclays’ Q2 2018 earnings and also detailed our expectations for the rest of the year in our interactive dashboard on Barclays’ Q2 earnings takeaways, the key parts of which are captured further below. We also reiterate our price estimate of $12.50 for Barclays’ stock, which is about 25% ahead of the current market price.
Investment Banking Operations Will Remain The Biggest Revenue Driver
Barclays reported total investment banking revenues in excess of £2 billion for Q2 2018 – a notably strong performance for the second quarter of the year, which is seasonally slower than the first quarter. This compares to revenues of under £1.9 billion in Q2 2017. The year-on-year gains can be attributed primarily to the jump in equity trading revenues, as these revenues increased to over £600 million for the first time in three years thanks to increased market volatility. This represents an increase of 32% compared to the figure a year ago. Although FICC trading revenues nudged lower, an increase in advisory & origination fees more than made up for this.
Going forward, we believe that investment banking will remain key to Barclays’ value, because of which we estimate that these operations contribute nearly 40% of the bank’s total share value. The bank’s strength in the FICC trading industry and in the global debt capital markets in particular should continue to drive profits in the long run.
Brexit Presents A Challenge To Barclays In The Near Term
The ongoing Brexit talks have had a visible impact on the U.K.’s economy, with the country’s banking industry reporting a decline in demand for mortgages, auto loans and other personal loans from retail customers. At the same time, businesses have also been reluctant to take on additional debt – slowing the rate of growth of commercial loan portfolios. Despite these headwinds, Barclays has did well to grow its loan portfolio in the U.K. over Q2 2018. Although this growth hasn’t translated into a corresponding increase in revenues over recent quarters, the swelling portfolio of loans will result in a significant jump in profits once the interest rate environment improves in the U.K.
Additionally, Barclays’ decision to retain its U.S. card business – even as it got rid of several operating units over the years – will play an important role in helping the bank mitigate the impact of slow growth in the U.K. This is particularly important given the strong outlook for the U.S. card industry in the near future.