Yesterday, the Barclays (LSE:BARC) share price suffered its biggest one day loss since Russia invaded Ukraine. It appears as though investors were unimpressed with the bank’s 2022 results, which were released earlier that day.
But sometimes, one person’s trash is another’s treasure. I wonder if this is the case with shares of the FTSE 100‘s third-largest bank?
Disappointing results
When looking at the results, the number 14 keeps cropping up.
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Although total income was 14% higher than in 2021, so were operating expenses. This resulted in profit before tax being 14% lower.
| Measure | 2021 (£bn) | 2022 (£bn) | Change (%) |
| Total income | 21.94 | 24.96 | + 14 |
| Operating expenses | 14.66 | 16.73 | + 14 |
| Profit before tax | 8.18 | 7.01 | – 14 |
Analysts had been forecasting earnings of £7.2bn, which probably explains the dramatic fall in the share price.
Barclays earns 70% of its revenue from outside the UK. Even with the dollar appreciating 10% against sterling, the bank was unable to meet earnings expectations.
And the return on shareholders’ equity fell from 13.1% in 2021 to 10.1% in 2022. Although above the board’s medium-term target of 10%, the reduction is significant.
Good news?
However, after taking a closer look at the results, I believe there are reasons to be optimistic.
Included within operating expenses were litigation and conduct costs. These were £1.2bn higher in 2022, largely due to fines and compensation paid in connection with the over-issuance of securities in the US. Although this is clearly a failure of internal controls — and reflects poorly on management — I don’t think this will be repeated.
The bank’s directors also expect the net interest margin (NIM) to increase this year. NIM reflects the difference between the interest earned on loans and that paid on deposits.
It’s forecasting its NIM in the UK to be in excess of 3.2% in 2023, compared to 2.86% last year. Based on current levels of UK customer assets of £206bn, this could generate an additional £0.7bn of income this year.
Also, the sudden fall in the share price means the stock is presently yielding more than the FTSE 100 average. The final dividend for 2022 will be 7.25p. If repeated in 2023, this implies a current yield of 4.3%.
Bad loans
One area I need to keep a close eye on is bad loans. With a gloomy economic backdrop, the risk increases of customers being unable to repay their borrowings.
Each quarter management makes an assessment as to the quality of the bank’s loans. If they believe there’s an increased chance of non-payment, they will include an impairment charge in the accounts. If the risk of default is perceived to be falling, a credit (income) is booked.
In common with most banks, Barclays’ impairment charge is increasing.
| Impairment (£m) | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 |
| (Charge) / Credit | (55) | 797 | (120) | 31 | (141) | (200) | (381) | (498) |
What do I think?
Personally, I think the dramatic fall in the Barclays share price is a bit of a market over-reaction. It’s now close to where it was six months ago.
With an exceptional charge in 2022 of around £1bn, and rising interest rates across the globe, 2023 should be a better year for the bank.
However, I already own shares in Lloyds Bank. And, I believe in the virtues of diversification. For that reason alone, I won’t be buying a stake in Barclays.
