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Barclays’ plan to buy back nearly half a Barclays looks part mechanical and part fantastical. Investors only seem half convinced:
The bank today pledged to return £10bn to shareholders via share buybacks over the next three years. The promise from chief executive CS Venkatakrishnan is premised on 2026 tangible equity exceeding 12 per cent and total income hitting £30bn. All these numbers are higher than the market consensus going into today’s (weaker than expected) fourth-quarter results.
Barclays blocked out an entire morning for investor briefings on top of the 26 separate update documents it has posted or will post. While those meetings continue, the easiest summary is that Barclays wants to rebuild its franchise using the slow-release benefit of higher interest rates as a foundation.
In part it relies on the repricing of interest rate swaps, which banks use to hedge stuff like instant-access current accounts. These so-called structural hedges smooth out income from banking assets not sensitive to rates and without maturity dates. The balance is reinvested as swaps mature, so in the years following interest rates rises there’s a cosmetic boost to income.
The below chart and quote are from Barclays’ November presentation on the theme:
[A]lthough the hedge is often referred to as a “tailwind” in that it increases income, when rates are rising it has actually had the effect of dampening income compared to having no hedge in place. This is indeed the case — it is a hedge after all. The real benefit of the hedge arises when rates are falling (or are stable after a period of rising). Effectively the structural hedge has the effect of partially deferring the benefit of rising rates to later periods when this income is expected to be more valuable.
All of which might sound zero-sum over the long term. The real tailwind comes from the difference in yields between new swaps that support new lending, known as the front book, and the maturing swaps that cover the back book of existing lending.
Barclays is likely to be the UK’s biggest beneficiary this year from structural hedge repricing because its notional is huge relative to peers, at more than half the size of the UK balance sheet, and a shorter average duration of 2.5 years. The chart below is taken from a November RBC note:
At the end of 2023, Barclays’ notional structural hedge had a value of £246bn. Most of that will roll off over the next couple of years at maturities of 1.5 per cent, or about 2 percentage points below the current yield, which according to Citigroup forecasts means approximately £3.5bn of extra revenue.
That covers the mechanical bit of today’s guidance, which should have been in consensus forecasts already. What about the actual growth?
Today’s guidance implies that Barclays’ investment bank will have more-or-less the same cost base and risk-weighted assets in 2026 as 2023, but will be generating between £2bn and £3bn more in revenues. The plan is for Barclays to cut out lower-return assets, basically, though it also wants to get better at cross-selling and bigger in areas where it’s currently quite small, such as European rates, equity derivatives and securitised products. Neat!
2026 targets look less ambitious in the UK, where the recent purchase of Tesco Bank helps Barclays fill out guidance for £30bn in additional RWA and annual net-interest-income growth in the mid-single digits.
What’s more important for both the UK and IB divisions is structural hedge repricing. About two-thirds of the revenue from will be booked by the UK bank, with the remainder going to the IB via its transactional banking division. Targets therefore don’t look too implausible.
That’s less true across the pond. Barclays wants its US cards business to hit $40bn by 2026, from $32bn last year, and for retail to grow to 20 per cent of the portfolio from 15 per cent currently. Once again it’s rapid expansion of RWA — to £45bn from £25bn at present — without commensurate increases in costs or risk.
Good luck, says Citi (with our emphasis):
US consumer targets appear most unrealistic in our view, assuming a decline in loan loss ratio to c400bps, while simultaneously aiming to grow NIM from 10.9% to >12% by increasing the proportion of retail balances and ‘rebalancing FICO mix to optimise risk-adjusted returns’. While balance growth to $40bn appears feasible, we struggle with the mid-40’s cost-income target and fear this business will continue to generate sub-par returns, especially in light of sizeable RWA inflation. We wonder if this business is core to the franchise or is better in other hands.
. . . which is an interesting thought.
With Capital One’s $25bn agreement to buy Discover Financial for $35bn offering a benchmark of sorts for valuing Barclays’ US consumer division, the most fantastical guidance given today could turn out to become the next owner’s problem.
Further reading
— Barclays to return £10bn to shareholders (FT)
Read the full article here