Barclays, one of the leading banks in the UK, experienced a drop in profits in the third quarter of this year, causing its stock to plummet and concerns to rise among investors. The bank’s net profit declined by 16% to £1.3 billion ($1.6 billion) due to a weak performance by its investment banking division and narrowing profit margins in its consumer-focused operations.
C. S. Venkatakrishnan, Barclays’ chief executive, acknowledged the challenges and assured investors that a strategic review would be conducted, which would result in significant cost cuts. He promised to provide further details on capital allocation priorities and revised financial targets during the full-year results announcement in February. “We see further opportunities to enhance returns for shareholders through cost efficiencies and disciplined capital allocation across the Group,” he stated.
The news that caused the most concern among investors was the forecasted decline in net interest margins (NIM). Barclays projected that NIM would range from 3.05% to 3.10% this year, compared to the previous estimate of 3.15% to 3.2%. This announcement resulted in a more than 5% drop in Barclays’ shares. Danni Hewson, the head of financial analysis at AJ Bell, explained the significance of this metric for banks, stating, “Net interest margin is the metric the banks are judged on so it is not a surprise to see Barclays heavily punished for downgrading guidance here even if profit for the third quarter was ahead of guidance.”
The impact of Barclays’ performance was felt across the UK banking sector. Shares of NatWest and Lloyds Banking also declined, with NatWest down more than 2% and Lloyds Banking off 1.6%. This struggle in the financial sector led to the underperformance of London’s FTSE 100, which experienced a 0.1% loss on Tuesday. In contrast, Frankfurt’s DAX gained 0.2% and Paris’ CAC 40 added 0.5%, benefiting from gains in luxury groups following positive reports from Hermes.
Another notable company facing difficulties is CAB Payments, a fintech group specializing in foreign exchange and payment services to emerging markets. Its shares plunged by a staggering 73%, causing it to lose more than 80% of its value since its IPO in London in July.
In the government bond sector, 10-year German yields fell by 4.6 basis points to 2.830% amid concerns about the global economy. Additionally, the euro, which initially saw gains, later traded down 0.3% to $1.0634. Analysts believe that the recent economic data from the eurozone makes it highly unlikely for the European Central Bank (ECB) to raise interest rates in its upcoming policy meeting on Thursday. This expectation is supported by the fact that the ECB is predicted to keep its main policy rates unchanged, as it did in June last year.
Overall, Barclays’ disappointing third-quarter results have caused concerns among investors and impacted the wider UK financial sector. The upcoming strategic review and cost-cutting measures announced by the bank’s chief executive are expected to address these challenges and enhance returns for shareholders. However, the decline in net interest margins and the underperformance of other UK banks illustrate the competitive pressures faced by the industry.
More detail via MarketWatch here… ( Image via MarketWatch )