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Can earnings boost Barclays’ shares?

Barclays share price: Barclays logo

Investors responded positively to Barclays’ [BARC] full-year results back in February, but the bank’s shares have since given up the gains made last year. Can the first-quarter earnings update on 27 April help turn the Barclays share price around?

The UK-headquartered bank found itself in hot water at the end of March when it discovered a major clerical error affecting the sale of trading products in the US. The group registered to sell $20.8bn of equities and securities in August 2019, but ended up exceeding this limit by $15.2bn.

To remedy the matter, Barclays will buy back the oversold notes for the price they were bought for. This is expected to result in a £450m hit, which is likely to clobber its Q1 results. A £1bn share buyback has also been paused. 

Barclays governance thrown into doubt

The blunder has raised questions about compliance at the banking group. It also poses awkward questions for chief executive C.S. Venkatakrishnan, who was chief risk officer from 2016 to 2020 when the slip-up occurred. 

Investors appear to have lost faith in the run-up to the trading update. The Barclays share price has tumbled 34.3% from its 52-week high of 219.6p set on 14 January to 144.18p at the close on 25 April. The stock hit a 52-week low of 140.6p on 7 April. 

Commenting on the trading blunder, Hargreaves Lansdown analysts wrote in a note: “The sound of regulators knocking on the door is never good for a bank. The mishandling of US securities is unhelpful for sentiment to say the least and raises some governance questions. But while the full effect of this error is yet to play out, it's important to focus on the bigger picture. This blunder is unfortunate, but not a derailment of the investment case.” 

All eyes on consumer spending and mortgages

Back in February, Barclays reported record annual pre-tax profits for fiscal 2021. Profits almost trebled year-on-year to £8.4bn, partly thanks to a reversal in impairment charges, which were written back in 2021 to the tune of £653m. Charges in 2020 totalled £4.8bn.

The performance was underpinned by the corporate and investment banking division, which accounted for £5.8bn of the pre-tax profit. A big jump in advisory fees and other capital markets activity pushed up income by 34% to almost £3.7bn. While UK operations also saw a decent performance, with profits rising to £2.47bn, driven by higher mortgage demand, there are caveats.

The biggest of these is that income from credit card balances fell as consumers cut back on spending and reduced their balances. As the Hargreaves Lansdown analysts pointed out: “When customers are nervous, card balances get paid down faster, resulting in reduced interest income”.

The worry is that the trend is likely to have continued in the first three months of this year, putting consumer spending in focus when Barclays reports earnings. Soaring inflation, interest rates, food prices and energy bills are hurting wallets. While this might have led to a sharp rise in borrowing, there could also be a significant increase in bad debts. Investors will likely be keeping a close eye on mortgages as applications are also likely to have fallen during the first quarter. 

These vulnerabilities highlight the weakness in Barclays’ dependence on profits from its investment banking division. That said, the Hargreaves Lansdown analysts believe that Barclays’ diversified business sets it apart from the rest of the banking sector. 

“That reduces its exposure to interest rates but doesn't eliminate it. Given its varied revenue base, that doesn't seem too demanding.”

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