Barclays warns of profit squeeze as customers react

Barclays warns of profit squeeze as customers react

Barclays Warns of Pressure on UK Business as Inflation and High Rates Squeeze Margins

Barclays, one of the leading banks in the United Kingdom, has cautioned investors about the mounting pressure on its UK business. The bank highlights stubborn inflation and high interest rates as the primary factors leading customers to repay debt and switch into savings. Consequently, this squeeze on margins has negatively impacted Barclays’ shares, despite the announcement of a fresh share buyback.

The first-half pretax profit for Barclays stood at £4.6 billion ($6 billion), aligning with analysts’ expectations. However, the bank indicates that profit margins are shrinking, causing concern among investors. The net interest margin (NIM), a crucial profitability measure, is expected to dip by the end of the year below the current half-year level of 3.2%. Previously, Barclays had guided that the NIM would be above this level. Presently, it is projected to come in at 3.15%.

Barclays Finance Director, Anna Cross, explained to reporters that the change in guidance comes as a result of shifting facts. Initially, interest rates in the UK were expected to peak at 4.25%, but they now sit at 5%. Additionally, persistent inflation and higher mortgage rates have contributed to the altered outlook.

These results shed light on the impact of sticky inflation in Britain, which currently has the highest rate among the G7 group of wealthy nations. Political pressure to support struggling savers has also deterred Barclays’ revenues from benefiting fully from the higher interest rates.

While the U.S. cards business has shown a strong performance, investment bank revenues have continued to decline due to the slump in global dealmaking. Jefferies, an investment bank, remarked that the £750 million share buyback provides a silver lining in what was otherwise a moderately disappointing quarter, with only the UK business meeting expectations. However, the lowered guidance on margins in Britain raises questions about Barclays’ future performance, according to Jefferies.

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Analysts at JPMorgan anticipate slight downgrades in Barclays’ future performance, attributing them to squeezed margins in Britain, intensifying competition, and households grappling with the pressures of the cost of living. As interest rates rise, borrowers are increasingly burdened, leading to a greater risk of loan defaults. Consequently, Barclays set aside £896 million in the six-month period to account for potentially soured loans, more than double the prior year’s charge of £341 million.

Challenges in the Investment Banking Division

Barclays reported a 10% decrease in income from its investment banking division, which fell short of analyst forecasts. Specifically, income from its fixed income, currency, and commodities division declined by 6% to £2.97 billion, while the equities unit experienced a significant drop of 49% to £1.3 billion.

This trend in underwhelming performance is not limited to Barclays alone. U.S. banking giants like Goldman Sachs and Citigroup also reported lackluster results in their investment banking divisions this month. However, JPMorgan’s finance chief, Jeremy Barnum, expressed optimism about growth in areas such as stock offerings.

European banks are facing similar struggles, with Deutsche Bank recently announcing that its investment bank revenues would decline this year, contrary to earlier expectations of flat growth.

Some investors have expressed a desire for Barclays to prioritize returning more capital to shareholders instead of further investments. This sentiment arose following the completion of a £500 million share buyback in April.

Overall, while Barclays’ first-half profit figures met expectations, the warning about squeezed margins in the UK and underperforming investment banking revenues presents challenges for the bank’s future performance. The impact of inflation, high interest rates, and intensified competition will undoubtedly test Barclays’ ability to navigate a rapidly changing economic landscape.

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