Is this an investment you can bank on? The Times - Wed August 05 20205 Aug 2020 19:15
First-half results from Britain’s biggest banks in the past few days have given investors a glimpse into the state of the nation’s economy — and the picture is not pretty. All the high street lenders took big impairments as they braced for a wave of bad debts from businesses and households hit by the coronavirus downturn.
Barclays - Shares in the trio of banks that are focused mainly on the UK market have tumbled this year amid fears about the impact of Covid-19. However, are they now oversold?
Barclays managed to make a profit in the first six months of the year, partly because it has something that Lloyds and Natwest do not possess: a big investment banking business.
A strong performance from this division helped Barclays to absorb the hit it took from a £3.7 billion impairment charge. As a result, it unveiled pre-tax profits of £1.3 billion, down sharply from £3 billion a year ago but better than the losses suffered by Lloyds and Natwest.
Its investment bank enjoyed a jump in revenues from its trading business, which benefited from whipsawing financial markets during the period. Revenues from its fixed-income, currencies and commodities division climbed by 83 per cent to £3.3 billion, while income from its equities business was up 26 per cent to £1.2 billion.
Jes Staley, Barclays’ chief executive since December 2015, has long championed the investment banking division, despite pressure from Edward Bramson, the activist investor, who since 2018 has pushed for the division to be cut back because of poor returns.
Mr Staley, 63, has argued that the investment bank should perform well during an economic slowdown, offsetting pressure at its credit card and retail operations. The group’s latest results appear to vindicate his strategy.
Still, the £1.6 billion that Barclays set aside for loan losses in the second quarter was higher than the market had expected. There also are concerns that the performance of its trading business cannot be sustained because the financial market volatility is likely to fade. Its shares are down about 40 per cent this year.
Conclusion
No one knows how long the pandemic will last. Assessing its impact on the economy and the banks that are so central to it is impossible. That uncertainty alone means that investors probably should steer clear of the banks.
The Bank of England has cut interest rates to record lows in response to the downturn. This poses a profound challenge for commercial banks’ business models, which seek to make money on the difference between the rate they charge on loans and the rate they raise deposits.
The big lenders also have been banned from paying dividends to shareholders this year by the Bank, which wants them to conserve cash during the pandemic. This ban could be extended into next year. For investors with an appetite for risk and who think that the worst of the crisis is behind us, bank stocks are cheap and the lenders remain well capitalised, making their shares a ri
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