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Will Barclays’ share price spike or decline on the back of its $15bn trading blunder?

Outside the Barclays New York headquarters

The Barclays [BARC] share price has been hit by the economic downturn, but with interest rates rising the company’s lending business could help it to report a positive half-year performance on 28 July.

The stock had plunged 12.1% year-to-date as of 25 July, and is down a further 26.8% from the 52-week high of 219.6p – its highest level since 2018 – that it set during intraday trading on 14 January.

Besides gloomy economic conditions, another factor weighing on investor sentiment towards the bank is an ongoing regulatory investigation into its US trading products. The SEC-led probe has also raised questions over the competence of the banking group’s chief executive CS Venkatakrishnan.

One upshot of the $15bn trading error, in which Barclays exceeded a limit on the sale of exchange traded notes by $15bn over a three-year period, was that Barclays indefinitely postponed its £1bn share buyback.

To repay investors affected by the slip-up, the bank said that it had set aside £540m, an increase from the £450m that it originally earmarked, according to the Financial Times. As the investigation is not yet concluded, the bank could see further fallout from the blunder.

Robust Q1 earnings

News of the trading blunder coincided with the group’s Q1 earnings update, which beat analyst expectations. Barclays’ net profit attributable to shareholders came in at £1.4bn, eclipsing consensus estimates of £644m. The robust earnings report was driven by a favourable interest rate environment which has seen net interest margins improve to 2.62%.

The group’s 10% year-on-year rise in income was partly boosted by its global markets division, which saw increased activity in fixed income clearing corporation (FICC) and equities.

Despite the regulatory hangover, investors cheered the bank’s positive performance, lifting shares 1.2% on the day of the announcement on 28 April.

However, it wasn't all good news. Barclay's CET1 ratio, which compares capital against assets, and its return on tangible equity both saw a year-on-year slowdown, rising by 13.8% and 11.5%, respectively, during the quarter. Operating costs also rose by 15% to £4.1bn, which was partly due to the litigation fees that were set aside.

However, other macro headwinds, such as the cost of living squeeze, did not weigh too heavily on the bank’s performance, with Barclays’ credit card arrears showing no signs of an increase. Customer deposits were also stable at £260.3bn.

Weakening consumer confidence

Looking ahead to the upcoming half-year results, Michael Hewson, chief market analyst at CMC Markets, reckons that Q2 “is likely to have been equally as challenging as Q1, if the recent numbers for US banks are any guide, where buybacks have been suspended, as banks set aside higher loan loss provisions and battled against a fall in investment banking fees”.

In the second half of the year, one factor that could see Barclays’ operating margins widen is the fact that the group handed its UK staff a £1,200 pay rise to help offset the rise in the cost of living and soaring inflation. This will come into effect on 1 August.

In addition, weakening consumer confidence could dent credit and housing market demand – two areas that investors will be watching closely. Despite the myriad of headwinds, Gary Greenwood, an analyst at Shore Capital, still believes the bank could post another earnings beat for Q2. He told This is Money that he doesn’t expect a “huge spike” in charges from bad loans based on the bank being more averse to risky lending.

Greenwood’s forecast for Barclays earnings announcement isn’t held by the majority of analysts, however. According to Yahoo Finance, a consensus earnings estimate of 7.57p is predicted among six analysts (as of 22 July), which is down from the 7.72p forecasted in the week prior. Group revenue is expected to reach an average of £6.2bn for the quarter, which would mark a 4.4% decrease from the first quarter’s £6.5bn.

The downbeat analyst estimates are reflected in the stock’s consensus ratings. The Barclays share price is rated a ‘hold’ based on seven analyst ratings on MarketBeat. The stock has an average price target of 244.56p, representing a 52.2% upside from its 25 July closing price.

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