Barclays expects H2 2020 to continue to be challenging

Barclays PLC (LON:BARC) today posted its financial report for the first half of 2020.

Profit before tax was £1,272 million in the first half of 2020, down from £3,014 million a year earlier. Excluding litigation and conduct, profit before tax was £1,302 million (H119: £3,128m), as positive operating leverage from an 8% increase in income and 3% reduction in operating expenses was offset by materially higher credit impairment charges

Total income increased 8% to £11,621 million. However, Barclays UK income decreased 11% due to ongoing margin pressure, including COVID-19 customer support actions, base rate reductions, lower UK cards interest earning lending (IEL) and overdraft balances, as well as lower income due to the removal of certain fees in overdrafts and UK cards.

Barclays International income increased 16%, with CIB income up 31% and CC&P income down 21%. Within CIB, Markets income increased due to a strong performance across FICC and Equities. Banking fees income increased reflecting a strong performance in debt and equity capital markets, while there was a reduction in Corporate income driven by fair value losses, margin compression and carry costs on hedges. CC&P income decreased primarily as a result of lower balances on co-branded cards and a c.£100m valuation loss on Barclays’ preference shares in Visa Inc.

Credit impairment charges increased to £3,738 million (H119: £928m). This increase primarily reflects £591 million in respect of single name wholesale loan charges and £2.4 billion impact from revised IFRS 9 scenarios reflecting forecast deterioration in macroeconomic variables (including a prolonged period of heightened UK and US unemployment), partially offset by the estimated impact of central bank, government and other support measures.

Attributable profit for the first half of 2020 was £695 million (H119: £2,072m). Excluding litigation and conduct, attributable profit was £710 million (H119: £2,158m), generating a RoTE of 2.9% (H119: 9.4%) and EPS of 4.1p (H119: 12.6p)

Total assets increased to £1,385 billion (December 2019: £1,140bn), primarily due to a £78 billion increase in derivative assets (with a corresponding increase in derivative liabilities), £52 billion increase in cash collateral and settlement balances, and £26 billion increase in financial assets at fair value through the income statement.

The low interest rate environment has resulted in significant decreases in forward interest rate curves which coupled with increased client activity and the appreciation of period end USD against GBP has resulted in rising asset values.

In response to a request from the PRA, and to preserve additional capital for use in serving Barclays customers and clients through the extraordinary challenges presented by the COVID-19 pandemic, the Board agreed to cancel the 6.0p per ordinary share full year 2019 dividend. The Board also decided that for 2020 Barclays would suspend its current capital returns policy and accordingly will not undertake any interim ordinary share dividend payments, regulatory accruals of ordinary share dividends, or share buybacks. The Board will decide on future dividends and its capital returns policy at year-end 2020

Given the uncertain economic outlook and low interest rate environment, Barclays expects the second half of the year to continue to be challenging.

Income in Barclays UK and CC&P is expected to gradually recover from Q220 levels, but certain headwinds including from the low interest rate environment, are likely to persist into 2021.

Impairment in H220 is expected to remain above the level experienced in recent years, but to be below the H120 credit impairment charge assuming no change in macroeconomic forecasts.

In H220 there may be headwinds to the Group’s CET1 ratio from procyclical effects on RWAs, and reduced benefit from transitional relief on IFRS 9 impairment. However, the Group’s CET1 ratio will continue to be managed to maintain an appropriate headroom above the MDA hurdle.