Barclays increases Covid-19 provisions as profits plunge

Barclays raised its provisions for coronavirus-related bad debts by £1.6bn in the second quarter as interim profits slumped and the bank forecast further headwinds into 2021.

Interim pre-tax profits fell to £1.2bn from £3bn a year earlier, with net operating income down 20% to £7.8bn. Second quarter impairment provisions reflected the height of Covid-19 lockdowns and were higher than the £1.4bn forecast.

Total bad debt provision so far this year came to £3.7bn with full-year estimates now exceeding £5bn as the banking sector braces itself for a wave of loan defaults as the economy heads for a recession.

The bank on Wednesday said that second-half impairment charges were expected to remain above the level experienced in recent years, but below the interims “assuming no change in macroeconomic forecasts”. It added that a decision on any dividend payments would be made at full year results.

“Given the uncertain economic outlook and low interest rate environment, the second half of the year is expected to continue to be challenging,” the bank said.

Barclays' capital ratio came in at 14.2%, up from 13.1% at the end of March as regulatory changes lifted reserves.

Income at its UK banking unit fell 11% due to ongoing margin pressure, including Covid-19 customer support actions, base rate reductions, lower UK cards interest earning lending and overdraft balances, as well as lower income due to the removal of certain fees in overdrafts and UK cards.

The fixed income, currencies and commodities division reported a 60% increase in income to £1.4bn during the second quarter as investors sought alternative positions from more volatile asset classes.

Income from equities rose 23%, while banking fees increased by 8% as business clients sourced cash from the equity and bond markets.

CAUTIOUS OUTLOOK

Interactive Investor head of markets Richard Hunter identified "noticeably weaker metrics", such as the return on tangible equity, which slumped to 2.9% from 9.1% and the credit cards divisions where falls in income were driven by the general current trend of customers to pay down personal debt wherever possible.

"In addition, the outlook for the second half of the year is notably cautious, not least of which due to the dependence on a strong recovery in developed economies such as the US and the UK, where unemployment remains a major concern," he said.

"In all, this is a relatively robust performance from a bank which generally benefits from diversification in both geography and product lines. Without question, the difficult economic clouds are likely to loom for some time yet which makes earnings visibility difficult."

"This has certainly been reflected in a share price which has declined 30% over the last year, as compared to a decline of 20% for the wider FTSE100, and 37% just in the year to date. Even so, this update shows that Barclays is preparing for the worst while hoping for the best and the market consensus of the shares as a buy is likely to remain intact.”

AJ Bell investment director Russ Mould said the size of loan losses racked up by banks so far would suggest the Prudential Regulatory Authority was right to propose the dividend and buyback ban.

A rise in the CET1 "could at least provide a spring board for future dividend payments, assuming the pandemic does not unduly linger and the economy shows something like a recovery in the second half of the year", he added.

“Analysts’ confidence in this optimistic scenario does seem to be wavering a little, as the consensus forecasts for Barclays’ calendar 2020 and 2021 dividends have slipped to 1.6p and 4.3p a share, compared to 2.6p and 6.1p back in April.