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(Alliance News) - Barclays PLC on Wednesday reported a sharp drop in interim profit, as the lender was forced to up its credit impairment charges dramatically to deal the fallout of the Covid-19 pandemic.
Shares were 3.7% lower in early morning trade in London on Wednesday morning at 107.70 pence each. The FTSE 100 stock is down 40% so far in 2020.
For the six months to June 30, Barclays pretax profit dropped 58% year on year to GBP1.27 billion from GBP3.01 billion.
Total income improved 8% to GBP11.62 billion from GBP10.79 billion, but Barclays was forced to up its credit impairment charges to GBP3.74 billion from GBP928 million the year before.
Barclays said the provision increase was largely due to "revised IFRS 9 scenarios" driven by Covid-19.
The scenarios reflect "forecast deterioration in macroeconomic variables including a prolonged period of heightened UK and US unemployment, partially offset by the estimated impact of central bank, government and other support measures".
As a result, net operating income sunk 20% to GBP7.88 billion from GBP9.86 billion.
Barclays UK income decreased 11% due to ongoing margin pressure, with its net interest margin worsening to 2.69% from 3.11% the year before. Barclays UK's loan book grew to GBP202.0 billion from GBP193.7 billion.
The loan book expansion was attributed to the UK government's Bounce-Back Loan Scheme and Coronavirus Business Interruption Loan Scheme.
Barclays International income increased 16%, with Corporate & Investment Bank income up 31% and Consumer, Cards & Payments income down 21%. Within CIB, Markets income increased due to a strong performance across FICC and Equities.
The lender's total operating expenses were reduced by 3% to GBP6.56 billion from GBP6.87 billion. As a result, Barclays cost-to-income ratio improved to 57% from 64% in the first half of 2019.
Barclays CET1 ratio ended the half at 14.2%, up from 13.8% at the end of 2019 and 13.4% at the same point a year before.
Despite the common equity capital improvement, Barclays risk-weight assets grew to GBP319.0 billion at June 30 from GBP295.1 billion at the end of 2019.
"Our CET1 ratio underscores the strength of our balance sheet. Although we will remain well capitalised and ahead of our minimum requirements, we may experience stronger capital headwinds in the second half of the year. The board will decide on future dividends and capital returns at the year-end 2020," said Chief Executive Jes Staley.
Barclays has cancelled its interim dividend - compared to the 3.0 pence payout the year before - following a request from the UK Prudential Regulation Authority for big UK banks to preserve additional capital. Barclays will decide on its future dividends and its capital returns policy at the end of 2020, it said.
Staley added: "While the remainder of 2020 will be challenging, our diversified model means we can remain financially resilient and continue to support our customers and clients."
Barclays also pointed to the low interest rate environment contributing to the "challenging" conditions.
Barclays said its impairment in the second half will remain "above the level experienced in recent years", but below the first half credit impairment charge.
The lender expects its Barclays UK and CC&P income to gradually recover from its second quarter lows, but the difficulties seen in the quarter are "likely to persist" into 2021.
The lender also believes its investment bank is "well positioned" for the future, following the increased trading volumes in the first half.
Barclays continues to target a return on tangible equity of over 10% and a cost-to- income ratio of under 60% over time, but targets remain subject to change depending on the evolution of the Covid-19 pandemic.
By Paul McGowan; paulmcgowan@alliancenews.com
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