Barclays’ 2018 Performance: Brexit Uncertainty Looms Over Bank

by Trefis Team
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Barclays PLC (NYSE: BCS) announced its Q4 and full year results recently. After reporting a significant loss of £1.92 billion in 2017, the bank returned to profitability in 2018, reporting a full-year net profit of £1.4 billion. The bank’s total revenue remained stable while its total operating expenses increased by approximately 6.5% in 2018. However, credit impairment charges reduced by 37% to £1.5 billion in 2018, leading to an overall net profit for the bank. This improvement was partially offset by a £150 million charge for Q4 for the impact of the anticipated economic uncertainty in the U.K.

We currently have a price estimate of $11 per share for Barclays, which is ahead of the current market price. We have summarized the key takeaways in our interactive dashboard on Barclays’ Q4 Earnings Overview, the key parts of which are captured in the charts below. You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see all Trefis Financial Services company data here.

Segment Performance:

  • Net interest income constitutes 45% of Barclays’ total revenue, and declined by approximately 8% in 2018 on account of lower interest rates, particularly in the U.K. This decline was offset by a 30% increase in revenue from trading income, leading to an overall marginal growth in the bank’s total revenue. Revenues from Barclays’ U.K. division remained constant in 2018 but declined by approximately 2% in Q4 2018. Considering Q4 trends, we expect revenues from U.K. operations to see continued pressure in the near future as uncertainty looms over Brexit.
  • Barclays’ Investment Banking division recorded revenues of $7.6 billion in fiscal 2018, an increase of approximately 5% from 2017. This increase can be primarily attributed to the Equities trading desk, which saw a 25% increase in its income in 2018. The Investment Banking division saw revenues soar in the first half of 2018, but since then revenues have declined across sub-segments. Low consumer confidence, poor investment sentiment, uncertainty over Brexit and escalating tension between the U.S. and China are further expected to adversely impact the Investment Banking division’s revenue, and therefore the bank’s overall revenue growth.
  • Barclays’ total operating expenses saw an increase of 6.5% in 2018, causing a marginal fall in the bank’s EBT margin. Credit impairment charges declined by 37%, and its effective tax rate reduced to 32.1% leading to an overall increase in the bank’s net profit. The loan portfolio increased by roughly 2%, driven by growth in its U.K. Personal Banking loan portfolio. This is significant since 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.

Post-Brexit Outlook:

Barclays has confirmed that it will pay a 6.5 pence per share dividend to shareholders in 2019, and plans to return a greater proportion of its earnings to shareholders via share buybacks in the future. The bank has also maintained its return on tangible equity (<9%) and CET1 (<13%) capital ratio targets. Barclays made an additional £150 million credit impairment charge to tackle the uncertainty created from the proposed U.K. withdrawal from the European Union. The U.K.’s economic growth slowed down in Q4, and the Pound is likely to further decline post-Brexit. This decline is likely to adversely impact Barclays’ loan portfolio outside the U.K., leading to lower interest income and negatively impacting overall revenues. Overall consumer activity (lower mortgages, housing and personal loans) will also be impacted, further lowering the bank’s net interest income and other sources of revenues. The overall impact of Brexit still remains uncertain, but Barclays likely faces an uphill task to achieve its objectives.

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