Credit Update: Barclays – No need to panic

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Barclays recorded a loss in 4Q23 due to structural cost actions of GBP 0.9b, but saw a profitable full year for FY23.
It expects to pay out GBP 10b back to shareholders over 2024 to 2026, which we find it hard for Barclays to support such a plan given softening growth prospect.
However, Barclays should be able to maintain its current profitability while maintaining its CET1 ratio in view of regulatory changes.
We do not find Barclays’ outlook appealing enough to justify the current valuations on its bonds.

Barclays recently came into the spotlight after reporting its full-year financial results for 2023. Despite experiencing a loss for its fourth quarter results, Barclays’ shares jumped 8.6% within the same day, after announcing the ambitious plan to distribute GBP 10b back to shareholders over the next two years.

In light of the recent earnings results and corporate developments, we will re-assess the Group’s financial and credit outlook moving ahead.

Barclays’ performance

For the quarter ended 31 December 2023 (“4Q23”), Barclays reported an attributable loss of GBP 111m, a significant drop as compared to the attributable profit of GBP 1,036m for 4Q22. Revenue moderated downwards by -3% year-on-year (“YoY”) from GBP 5,801m, (4Q22) to GBP 5,598m (4Q23) largely due to the jump in costs. Operating costs surged by a considerable +26% YoY, from GBP 3,748m (FY22) to GBP 4,735m (FY23), primarily contributed by structural cost actions (“SCAs”) of GBP 927m executed in 4Q23.

The SCAs are initiatives expected to improve future financial performance. Of the GBP 927m, GBP 340m was utilized for the management of headcount, GBP 227m was used for office lease exits and footprint rationalisation, and lastly, GBP 360m was for the write-down of intangible assets. The SCAs are part of the measures adopted by the management to drive better performance across the company, which will be further discussed in Barclays’ outlook.

For Barclays’ full-year results (“FY23”), the attributable profit fell -15% YoY from GBP 5,023m (FY22) to GBP 4,274m (FY23). Despite seeing improved revenue of +2%, higher total operating expenses (largely due to the GBP 0.9bm SCAs in 4Q23) and higher credit impairment charges (+54% YoY) resulted in the fall in attributable profit. Excluding the impact of the SCAs, Barclays would see higher attributable profit as compared to the previous year.

Management of costs continues to be a challenge for Barclays, which underscores the need for SCAs. Excluding the addition of SCAs on top of operating costs, it still sees an increase of approximately +6% YoY.

Regarding the credit impairment charges, the increase was largely driven by its Consumer, Cards & Payments (“CC&P”) division which saw higher delinquencies in US cards. CC&P alone saw an increase of +87% in credit impairment charges, responsible for the majority of the increase for FY23. Barclays, however, explained that this increment from US cards had been anticipated and expects the loan loss rate to normalize downwards to the long-term average of 400 basis points (“bps”) from the current 636 bps as of 4Q23.

Chart 1
Barclays’ historical performance (GBP m)

Overall, Barclays’ income broadly falls within expectations with the peaking of net interest margin (“NIM”) experienced in FY23. For the Barclays UK (“BUK”) division – the largest contributor of NII across the Barclays, NIM has been on a slight downtrend across the year, at 3.18% in 1Q23 but fell to 3.07% in 4Q23. Although Barclays still benefited from higher net interest income (“NII”) in FY23 (Chart 1), we expect deposits passthrough to increase from here. NII growth is likely to be minimal and might potentially plateau, but it should remain higher relative to the pre-rate hike period.

Outlook for Barclays

Barclays has announced multiple initiatives moving forward. Firstly, with respect to the SCAs, Barclays expect these initiatives to provide savings of about GBP 500m in 2024 alone, while paying back the amount in less than 2 years. The intention for the SCAs is primarily for lowering costs, which we see a need for given the prospects of slower income growth.

Next, Barclays will be restructuring its business segments into five operating divisions – namely Barclays UK, Private Bank & Wealth Management, US Consumer Bank, UK Corporate Bank and Investment Bank. The restructuring allows Barclays to attain greater focus within the new operating division, which we expect to further drive synergy across its operations and assist with cost management.

Additionally, Barclays is embarking on a series of small but impactful measures. Some actions are expansionary, some serve to reduce the risk exposure while others help to improve operational capabilities. Examples would be the recent purchase of Tesco Bank by Barclays UK to expand its lending portfolio, while it is selling approximately GBP 1b worth of credit card receivables to Blackstone Inc to reduce risk-weighted assets (“RWAs”). Separately, it continues to invest in technological enhancements which help to lower operational costs and better manage operational risk.

With these planned initiatives, Barclays has depicted a rosy outlook which appears slightly too optimistic in our view. We believe the ongoing developments will help to drive better performance but there are several challenges the bank faces at the moment. We mainly see difficulties in growing its NII while the investment bank continues to face an uphill battle (given its overly optimistic macro-economic assumptions to support market activity) and sees a downward trend of RoTE since FY21 (FY21: 14%, FY22: 9%, FY23: 7%).

With the announced actions, management has also guided for a Return on Tangible Equity (“RoTE”) of 12% by 2026 and expects to pay out at least GBP 10b worth of distributions back to shareholders. Such targets appear relatively ambitious as compared to the RoTE of 9% as of FY23 and GBP 7b that was distributed back to shareholders from 2021 to 2023.

Overall, we largely expect Barclays to miss their ambitious targets for 2026. Our view is in line with Bloomberg estimates for Barclays’ FY24 and FY25 results (Chart 2), which reflects single-digit growth – just not as optimistic as Barclays projected. With that said, we still feel Barclays is taking a step in the right direction, but investors should look at Barclays’ promises with some reservation.

Chart 2
Barclays’ future performance by Bloomberg estimates (GBP m)

Credit Highlights

Barclays’ credit profile remained relatively stable across FY23, but it expects RWAs to increase due to regulatory changes. The CET1 ratio stands at 13.8% as of December 2023, falling slightly from 14.0% as of September 2023. The fall was largely driven by the dividend payouts and the increase in RWA across the quarter, contributing a decrease of 9 bps and 23 bps on the CET1 ratio respectively.

Accounting for the GBP 1b share buyback announced in the FY23 results, the pro forma CET1 ratio will fall further to 13.5% as of December 2023. On the other hand, the CET1 ratio remains within the 13-14% target range in the medium term, with a comfortable buffer over the maximum distribution amount of 12.0% hurdle for its CET1 ratio.

Looking ahead, Barclays anticipates an increase of 5% to 10% in its RWA due to regulatory changes. Specifically, the increase in RWA will come from the transition to an internal ratings-based model from the standardized model for its US Cards portfolio in 2H24, and also from the transition to Basel 3.1 in July 2025. The bank primarily expects the increase to be within the lower end of the aforementioned range. With Barclays taking pre-emptive measures (of reducing risk exposure) to contain the impact on RWA, we do not expect the increase to be a significant issue for Barclays.

Meanwhile, we continue to see more than sufficient liquidity for Barclays. Though there is a decline in the liquidity pool at GBP 298.1b as of December 2023 (as compared to GBP 318.0b as of December 2022), it still covers a majority (~55%) of total deposits while key liquidity metrics remained strong. The average liquidity coverage ratio and net stable funding ratio are at 161% and 138% respectively, both well-buffered from the regulatory requirement of 100%.

Given the expectations for Barclays to remain profitable, we find minimal reasons to be concerned with Barclays’ CET1 ratio. We think earnings are likely to offset the anticipated increase in RWAs. Although its capital distribution plans might have implications on the CET1 ratio, we believe Barclays would likely prioritise its CET1 target over excessive distribution.

Barclays SGD and USD bonds

Table 1
BACR SGD Issuances

Issuances	Ask Price	Yield to Call/ Maturity	Years to Call/ Maturity	Reset Rate
BACR 8.300% Perpetual Corp (SGD)	104.30	6.98% / -	3.54 / -	Reset Date: 15 Dec 2027 and every 5 years thereafter Reset Rate: 5-year SORA-OIS + the Margin (5.641%)
BACR 7.300% Perpetual Corp (SGD)	100.05	7.35% / -	4.29 / -	Reset Date: 15 Sep 2028 and Every 5 Years Thereafter Reset Rate: 5Y SORA OIS + Initial Margin (3.929%)
BACR 3.750% 23May2030 Corp (SGD)	98.89	4.76% / 4.79%	1.23 / 6.23	Reset Date: 23 May 2025 Reset Rate: 5Y SGD Swap Rate + initial re-offer spread (1.589%)
Sources: Bloomberg Finance L.P., Bondsupermart, iFAST Compilations. Data as of 1 March 2024.

Barclays SGD Tier 2 subordinated bond BACR 3.750% 23May2030 Corp (SGD) seems lacklustre as compared to other European banks’ Tier 2 papers of similar credit ratings. We do not find Barclays’ outlook appealing enough to justify the current valuations, albeit we do expect its performance to stay largely stable from here.

The recently issued BPCEGP 5.000% 08Mar2034 Corp (SGD) is a good alternative offering a yield to worst of 4.97% at the ask price of 100.15. Otherwise, for a similar short tenor, investors may instead consider ACAFP 3.950% 22Jul2032 Corp (SGD) at a similar yield but with a higher credit rating.

For SGD AT1 perpetuals, BACR 8.300% Perpetual Corp (SGD) stood out among the SGD AT1 perpetuals as one of the better options given the high initial margin of 564 bps. Existing bondholders also need not be concerned about the potential of coupon deferrals as we expect Barclays to maintain the coupon payments given its earnings outlook. However, we find the bond slightly overvalued for similar reasons to its SGD Tier 2 bond. For AT1 perpetuals as a whole, we remain wary of the risks, specifically the risk of loss absorption – as we have highlighted in a previous article discussing the state of AT1 bonds.

Table 2
BACR USD Fixed Rate Issuances

Issuance	Seniority	Ask Price	Yield to Call/ Maturity	Years to Call/ Maturity
BACR 4.375% 12Jan2026 Corp (USD)	Senior unsecured	98.28	- / 5.36%	- / 1.87
BACR 7.385% 02Nov2028 Corp (USD)	Senior unsecured	106.02	5.54% / 6.06%	3.67 / 4.68
BACR 7.437% 02Nov2033 Corp (USD)	Senior unsecured	109.87	5.96% / 6.15%	8.68 / 9.68
BACR 7.119% 27Jun2034 Corp (USD)	Tier 2 subordinated	104.35	6.49% / 6.66%	9.33 / 10.33
Sources: Bloomberg Finance L.P., Bondsupermart, iFAST Compilations. Data as of 1 March 2024.

For Barclays USD issuances, spreads appear relatively tight in contrast to our opinion of Barclays’ outlook, similar to its SGD issuances. As such, we prefer investors to look at alternative short-duration USD issuances instead. One would be senior unsecured HSBC 4.180% 09Dec2025 Corp (USD), offering a yield to worst of 5.99% at the ask price of 98.67, with about 0.77 years to call.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in BACR 8.300% Perpetual Corp (SGD), and the analyst who produced this report holds a NIL position in the abovementioned securities.

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Credit Update: Barclays – No need to panic

Barclays’ performance

Chart 1
Barclays’ historical performance (GBP m)

Outlook for Barclays

Chart 2
Barclays’ future performance by Bloomberg estimates (GBP m)

Credit Highlights

Barclays SGD and USD bonds

Table 1
BACR SGD Issuances

Table 2
BACR USD Fixed Rate Issuances

In this article

BACR 3.750% 23May2030 Corp (SGD)

BACR 8.300% Perpetual Corp (SGD)

BACR 7.300% Perpetual Corp (SGD)

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Credit Update: Barclays – No need to panic

Barclays’ performance

Chart 1Barclays’ historical performance (GBP m)

Outlook for Barclays

Chart 2Barclays’ future performance by Bloomberg estimates (GBP m)

Credit Highlights

Barclays SGD and USD bonds

Table 1BACR SGD Issuances

Table 2BACR USD Fixed Rate Issuances

In this article

Select Country/Region

Chart 1
Barclays’ historical performance (GBP m)

Chart 2
Barclays’ future performance by Bloomberg estimates (GBP m)

Table 1
BACR SGD Issuances

Table 2
BACR USD Fixed Rate Issuances