As stock markets opened this morning, the Barclays (LSE: BARC) share price crashed by 6%. Right now, it is the biggest FTSE 100 faller. This looks completely at odds with its strong results posted just early today. But it is not and I can see three reasons for this.
#1. Earnings boost was priced in
The Barclays share price has been on the rise this week as other banks’ results trickled in. Strong performances by HSBC, Lloyds Bank, Standard Chartered and NatWest had most likely raised expectations for Barclays too.
All banks posted expectations-beating earnings numbers as bad loan provisions were reduced. In the first quarter of 2020, big provisions were made as the pandemic took over and the economy’s future became a big unknown. In terms of financials, this showed up as a sharp reduction in net profit or even losses in some cases.
However, with vaccine development, massive public spending and the quick bounce-back in economic growth as lockdowns are eased, banks have turned hopeful for the rest of 2021. This means that credit impairment charges or bad loan provisions are no longer the big drag on banks’ profits that they were in Q1 2020.
I reckon that with this as the defining trend for banks’ Q1 2021 earnings, a sharp jump in Barclays’ numbers was already priced in.
#2. Barclays’ lending growth weak
Barclays’ profit after tax was up by 126% to £1.9bn in Q1 2021 year-on-year. Its credit impairment charges were down to 2.5% of their levels this time last year. And its earnings per share more than doubled.
But its UK lending numbers painted a mixed picture. There was almost no sequential improvement (up 0.1% from Q4 2020) in lending, though there was a 5% increase from Q1 2020. Its loan-to-deposit ratio was also a lower 88% compared to 96% for Lloyds Bank.
I think these are important numbers. The UK is a far smaller market for Barclays than it is for Lloyds Bank, but it does make up for half the bank’s revenues.
#3. Conservative outlook
Barclays does not expect improvement in its UK market in 2021 either. In its outlook, the bank said: “Headwinds to income in Barclays UK are expected to persist in 2021, driven by the subdued demand for unsecured lending.” It is more positive on its corporate and investment banking business, however.
Takeaway for the Barclays share price
I think diversification across business lines has been a positive for Barclays for now. For the rest of 2021, it expects a pick-up in the US cards business, which is also a gain from its cross-geography presence.
These can add to the improvement in financial health seen in this quarter, even if it is not quite ahead in the UK lending market right now. I also like that it is still competitively priced compared to other banks. And this is despite the fact that its share price is back to the highs of 2019.
I think the share price fall is a reason for me to buy it.
