Idea of the Week – Here’s another UK bank looking great

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• Barclays saw better results in FY24, after a slightly disappointing financial performance in FY23.
• We continue to see growth in total income and profit before taxes, while Barclays still sees a growing net interest income.
• Earnings are likely to stay stable for now, with growth in income to be offset by impacts arising from a potential recession.
• We still see some interesting names from Barclays – be it our all-time investors’ favourite BACR 8.300% Perpetual Corp (SGD), or BACR 9.625% Perpetual Corp (USD) offering an attractive close to 8% yield to call. 

The financial results for Barclays PLC (“Barclays”) might seem disappointing at the end of 2023, but it has definitely come out stronger in FY24. The UK bank continues to benefit from the elevated interest rates and strong market activity across 2024. Posting strong financial results, we see some interesting Barclays issuances across various currencies to highlight, especially our investors’ favourite – BACR 8.300% Perpetual Corp (SGD). 

Financial Highlights

For the year ended 31 December 2024 (“FY24”), Barclays continues to record growth in total income and profit before tax year-on-year (“YoY”). Group total income rose +6% YoY, up from GBP 25,378m in FY23 to GBP 26,788m in FY24. Barclays’ profit before tax saw a higher jump at +20% YoY, up from GBP 6,557m in FY23 to GBP 8,108m in FY24 (Chart 1). Correspondingly, Barclays’ key performance metric – Return on Tangible Equity (“RoTE”) – rose from 9.0% in FY23 to 10.5% in FY24.

Underpinning the growth in total income was higher revenue across all business divisions. Particularly, significant contributors were the Barclays Investment Banking arm (+7% YoY owing to increased market activities) and the Barclays UK arm (+9% inclusive of gains on Tesco Bank acquisition), fuelling more than90% of the total income growth across FY24.

Despite rate cuts being observed across major central banks, Barclays’ net interest income (“NII”) managed to grow by +3% YoY. The Group NII (excluding Investment Bank and Head Office) increased from GBP 11.0b in FY23 to GBP 11.3b in FY23, with GBP 0.1b attributable to the newly acquired Tesco Bank under Barclays UK. We believe that the growth in NII was made possible with Barclays’ robust structural hedge position. The gross hedge income (i.e. NII earned through the structural hedge position) increased from GBP 3.6b in FY23 to GBP 4.7b in FY24 and, per management, is expected to further increase to GBP 4.9b in FY25 (Chart 2).

Similarly, Barclays saw an increase in the Group’s (excluding Investment Bank and Head Office) net interest margin (“NIM”) from 4.11% across FY23 to 4.28% across FY24. The management highlighted continued structural hedge momentum and higher card balances in Barclays US Consumer Bank being the primary reasons for the increase, dampened by mortgage margin compression in Barclays UK and adverse product dynamics in deposits.

We observed a reduction in total operating expenses, which helped with the increment in profit. Barclays saw lower total operating expenses of GBP 16,735m in FY24, slightly down from GBP 16,931m recorded in FY23. The bank primarily saw a reduction in operating costs, owing to the absence of structural costs actions amounting to GBP 927m in FY23, but the impact was offset by higher UK regulatory levies and higher litigation and conduct expenses.

With the restructuring carried out in 4Q23, the management reflected that it has seen approximately GBP 1b gross efficiency savings in FY24, allowing the Group to offset the impact coming from inflation and enabling additional investments. It indicated that the bank expects to see another GBP 1b savings to be realised across FY25 and FY26. Barclays reported a cost-income ratio of 62% for FY24 and targets for the ratio to continue falling to high-50% by FY26.

Higher credit impairment charges ate into Barclays’ profit, but asset quality remains stable. Barclays saw higher credit impairment charges of GBP 1,982m in FY24, up from GBP 1,881m in FY23. The rise in the charges was largely a result of the acquisition of Tesco Bank recognised in 4Q24, contributing GBP +209m to the credit impairment charges. Excluding all inorganic activities, the pro-forma credit impairment charges will instead be lower at GBP 1,747m. The Group recorded an average loan loss rate of 46 basis points (“bps”) across FY24, which further lowered to 42 bps excluding the impact of the Tesco Bank acquisition. Barclays expect to maintain a loan loss rate between 50 to 60 bps across FY25 and FY26.

We see an improvement across the Barclays US Consumer Bank – the largest contributor to Barclay’s impairment charges, with the loan loss rate trending downwards across FY24. Specifically, the management mentioned that card delinquencies in the US are becoming stable, while the impairment charges fell from GBP 1,438 in FY23 to GBP 1,293m in FY24. It expects the loan loss rate attributable to the US Consumer Bank in FY25 to be similar to FY24, especially considering the impact of the General Motors partnership from 3Q25 onwards.

Barclays’ loan portfolio is fairly diversified, across mortgages (99% located in UK), corporate loans, credit cards and other retail loans (Chart 3). More importantly, we noted a relatively minimal exposure in the commercial real estate (“CRE”) sector among the corporate loans at just 4.7% of the total loans portfolio. Among this CRE portfolio, office CRE accounts for ~10% – with 26% of the office CRE located in US and 56% in UK. Credit impairments on mortgages and corporate loans have generally remained low for Barclays and we are not expecting the volatile US office CRE to have a significant impact on Barclays’ loan portfolio.

Chart 1 – Group income composition over past years

Chart 2 – Barclays’ structural hedge income across recent years

Chart 3 – Barclays’ loan portfolio composition by gross exposure as of Dec ‘24

Outlook for Barclays

We largely expect Barclays’ earnings outlook to be stable in the near term, given that certain downside risks have escalated in the recent period.

On one hand, we see a good possibility of improvement in the top line given the bank’s anticipated guidance and targets, alongside their planned strategy. Barclays’ management presents a clear intention to leverage on positive jaws effect to improve the overall performance – increasing total income to GBP 30b by FY26 and reducing the cost-income ratio to high-50%. A greater proportion of the revenue growth is expected to come from Retail & Corporate, which serves to provide Barclays with a stable source of income as compared to the more market-dependent Investment Banking fees and Intermediation fees.

We might not see new strategies coming from Barclays, but FY25 and FY26 would be a good runway for the bank to double down on its current strategy. The restructuring at the end of FY23 saw the Group focusing on being “simpler, better and more balanced” as its overall direction. Thus far, we see this strategy working well in FY24, with the re-organisation into simpler divisions being able to drive further growth and better results. The management continues to emphasise their goal to return GBP 10b of capital to shareholders between 2024 to 2026, with GBP 3b already paid out as of FY24 (Table 1).

Table 1 – Barclays’ guidance for FY25 and strategic targets by FY26

	2024 Actuals	2025 Guidance	2026 Targets
Income	GBP 26.8b	-	c. GBP 30b
Group NII (excl. Investment Bank and Head Office)	GBP 11.3b	GBP 12.2b	-
Barclays UK NII	GBP 6.6b	GBP 7.4b	-
Cost-income ratio	62%	c. 61%	High 50%
Loan Loss Rate	46 bps	50-60 bps	50-60 bps
Statutory RoTE	10.5%	c.11%	>12%
Total payout	GBP 3.0b	Progress increase vs FY24	At least GBP 10b across FY24 to FY26
CET1 ratio	13.6%	13-14%	13-14%
Source: Barclays’ FY24 Presentation. “-” reflects no guidance/target provided for that financial year.

Meanwhile, the management has shown a focused intention of driving the operational capacity and efficiency in individual business divisions. For example, Barclays UK will primarily focus on the integration of Tesco Bank to reduce costs and drive loan growth, the US Consumer Bank intends to establish more corporate card partnerships, while the Investment Bank is looking to further grow its footprint in the US to capture more deal activities. We expect the smaller, directed efforts across the business divisions to collectively allow for revenue growth in the near term.

However, efforts made to grow the revenue might be offset by increasing downside risks. In view of the ongoing trade war, the woes of a recession in the US and respective trade partners escalated significantly. With trade expected to decline, most countries have or are expected to adjust their respective GDP forecast for the year. For Barclays, a global or EU recession likely leads to greater write-offs for loans, as we expect a greater impact to potentially be reflected on corporate loans. Particularly, we see a good likelihood for a US recession to result in a reversion in loan loss rates in the US Consumer Bank, possibly back to higher levels as observed during FY23.

Beyond the impact of loans, we similarly expect some impacts on the overall loan growth and consequently, net interest income, alongside lessened market activity affecting Investment Banking revenue. As a result, we see a strong likelihood of the impacts from a potential recession to offset the planned revenue growth, therefore expecting earnings to remain at current levels for the time being.

Credit Highlights

Barclays holds a Common Equity Tier 1 (“CET1”) ratio of 13.6% as of December 2024, a drop from 13.8% as of December 2023. Despite seeing quite significant capital contributions from the profit, the increase was offset by shareholder distributions, an increase in risk-weighted assets, other capital movements and also acquisition of Tesco Bank (Chart 4). Barclays currently holds ~140 bps buffer to the expected minimum distributable amount (regulatory) requirement of 12.2%, applicable in 1Q25.

While the buffer is on the low side as compared to most European peers, we believe this remains sufficient as the bank’s capital generation capability from continued profits would be able to offset most of the negative impact on CET1 capital. Meanwhile, Barclays’ management expects to maintain the CET1 ratio within the range of 13% to 14% over FY25 and FY26.

Barclays’ liquidity position continues to stay robust, with the average Liquidity Coverage Ratio (“LCR”) and Net Stable Funding Ratio (“NSFR”) at 172% and 135% as of December 2024 respectively – both well above the regulatory requirement of 100%. The bank reflects high-quality liquid assets (“HQLA”) of GBP 281b as of December 2024 – an increase from GBP 274b as of December 2023 and covers ~50% of the total deposit base. Within the HQLA, cash makes up the majority of the assets at GBP 196b (~70%).

Chart 4 – Barclays’ CET1 ratio movement across FY24

Recommendations

Regarding Barclays’ issuances, we see interesting opportunities for investors’ consideration, particularly as we believe Barclays offer an attractive yield against its UK banking peer – HSBC. While yields rose slightly for HSBC papers owing to the tariffs, Barclays remain an appealing choice for investors at just one notch lower in credit rating.

We find the BACR 7.385% 02Nov2028 Corp (USD) to be a great consideration at ~4.9% yield to call, and a relatively short tenor to call (of ~2.5 years). For investors seeking longer tenors, the longer-dated options BACR 7.437% 02Nov2033 Corp (USD) and BACR 7.119% 27Jun2034 Corp (USD) offer yields that more than adequately compensate for the increased duration. These senior unsecured notes rank lowest for their priority towards loss absorption and would be suitable for conservative investors.

Among the Additional Tier 1 (“AT1”) notes, we particularly like the BACR 9.625% Perpetual Corp (USD), BACR 7.300% Perpetual Corp (SGD) and BACR 8.300% Perpetual Corp (SGD) – with the BACR 8.300% still in great demand among SGD bond investors. For both the BACR 9.625% and BACR 8.300% papers, we favour these owing to the high reset margins at 5.775% and 5.641% respectively – increasing the already-high likelihood of redemption upon the first call date. That said, investors should still consider the possibility of a non-call scenario before investing in perpetual securities.

Lastly, highlighting the BACR 6.158% 28May2035 Corp (AUD), this Tier 2 subordinated paper offers more than 200 bps yield-pick up against a 5-year Australian Government Bond. With an investment-grade rating, this is one of the most attractive options across the AUD bond space. Both the BACR 6.158% AUD and the BACR 8.300% SGD papers are available in odd lots of just $5,000 for Accredited Investors on Bond Express.

Table 2: Preferred Barclays’ issuances across AUD, USD and SGD

Issue	Ask Price	Yield to Call/ Maturity	Years to Call/ Maturity	Tier	Bond Credit Rating (S&P/Fitch )
BACR 7.385% 02Nov2028 Corp (USD)	105.645	5.99% / 5.77%	2.55 / 3.55	Senior unsecured	BBB+/ A
BACR 7.437% 02Nov2033 Corp (USD)	108.643	5.99% / 6.18%	7.56 / 8.56	Senior unsecured	BBB+/ A
BACR 7.119% 27Jun2034 Corp (USD)	104.468	6.41% / 6.55%	8.21 / 9.21	Senior unsecured	BBB+/ A
BACR 9.625% Perpetual Corp (USD)	107.000	7.82% / -	4.67 / -	Additional Tier 1	BB-/ BBB-
BACR 7.300% Perpetual Corp (SGD)	103.200	6.18% / -	3.17 / -	Additional Tier 1	BB-/ BBB-
BACR 8.300% Perpetual Corp (SGD)	106.000	5.62% / -	2.42 / -	Additional Tier 1	BB-/ BBB-
BACR 6.158% 28May2035 Corp (AUD)	101.918	5.72% / 5.89%	5.12 / 10.12	Tier 2	BBB-/ BBB+
Sources: Bondsupermart, iFAST Compilations. Data as of 14 April 2025.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in BACR 8.300% Perpetual Corp (SGD) and BACR 6.158% 28May2035 Corp (AUD), and the analyst who produced this report hold a NIL position in the abovementioned securities.

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