Shares in Barclays (BARC), the first UK bank to report its earnings for last year, fell 3.3% to 149p despite posting profits which beat market forecasts and resuming dividends.
In fairness, Barclays shares - along with those of most European banks - have rallied strongly in the last fortnight on a combination of high expectations for the investment banking business and hopes of a vaccination-led ‘return to normal’ for the economy.
FORECAST-BEATING EARNINGS
Full year pre-tax earnings of £3.1 billion were 50% ahead of market forecasts, even after the bank raised its provision for potential credit losses to £4.8 billion compared with £1.9 billion the previous year due to ‘the deterioration in economic outlook’ driven by Covid.
A large part of the beat was due to the investment banking business, which delivered a record £12.5 billion of income during the year - 22% more than the previous year and over half the total group income figure of £21.8 billion - thanks to strong markets and gains in market share.
However, consumer caution during the pandemic led to a 22% fall in retail lending and credit card income to £3.4 billion, as customers reined in their spending and built up their savings instead, producing a double negative effect on the bank’s income statement.
Nonetheless, the bank’s capital adequacy improved with a Core Equity Tier One (CET1) ratio of 15.1%, an increase of 130 basis points (1.3%) on the previous year.
That allowed Barclays to declare a 1p per share dividend for last year together with a share buyback of up to £700 million, for a total shareholder return of 5p per share.
DOWNPLAYING THE RECOVERY
However, the bank painted a downbeat picture of the outlook, saying it expects ‘headwinds to income to persist in 2021 and the medium term' for its UK business, including 'subdued demand for unsecured lending and the low interest-rate environment'.
Even in the international business, which includes the investment bank, the outlook ‘remains uncertain and contingent on the evolution of US and UK spending and card balances’.
In addition, Covid-related costs are likely to remain ‘elevated’ in 2021 with the bank needing to reduce its 63% cost-to-income ratio through further efficiencies.
