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The Barclays (LSE: BARC) share worth has loved a powerful run in current months, supported by regular earnings, share buybacks, and sturdy web curiosity revenue. But, with excessive mortgage prices and family funds below stress, buyers might ponder whether this momentum can proceed – or if optimism is already totally priced in.
Q3 outcomes
Earlier within the week, the blue eagle financial institution reported a powerful set of quarterly outcomes. Group revenue rose 11% yr on yr to £7.2bn, pushed by a resilient UK enterprise and enhancing momentum within the US.
Steady deposits and sturdy UK lending resulted in a surge in web curiosity revenue (NII) of 16%, prompting administration to boost full-year 2025 NII steerage to greater than £12.6bn.
Regardless of each enterprise division delivering a double-digit return on tangible fairness (RoTE), the group RoTE fell from 12.3% to 10.6%. This decline was largely on account of two components:
- An 8% enhance in tangible fairness (e book worth), which raises the denominator of the RoTE calculation.
- A one-off impairment of £235m referring to a motor finance provision.
I’m not overly involved about this fall in RoTE, since administration remains to be guiding for a return of greater than 12% by 2026.
Structural hedge
An important driver of NII stays the structural hedge. This smooths revenue over time by investing buyer deposits into fixed-rate devices.
A key enabler of the hedge is steady buyer deposits, which permit the financial institution to take a position a good portion of this money into longer-term, higher-yielding belongings. Consider it like a jar of money incomes a set fee over a number of years.
At Q3, the overall hedge stood at £233bn, with a median period of three.5 years and a median yield of round 3.8%. As older, lower-yielding hedges mature, they’re changed by higher-yielding ones. So even when rates of interest fall, Barclays has successfully locked in elevated revenue for a number of years.
Financial well being
Within the wake of Covid, governments flooded the UK and US economies with liquidity. Over time, lower-income households have drawn down these extra financial savings, however wealthier cohorts – who maintain a bigger share of financial institution deposits – stay cash-rich.
On the similar time, rising inventory and property costs have inflated asset values, enabling greater earners to maintain spending and propping up demand throughout the financial system.
Banks, for now, sit in what I describe as a ‘candy spot’: steadiness sheets are sturdy, impairments are low, and margins stay broad. However the query is how lengthy this may final.
Every quarter, extra debtors are refinancing debt at greater charges. This gradual repricing is sort of a slow-moving wave — or perhaps a tsunami — constructing beneath the floor. Larger mortgage prices will squeeze shoppers, companies will face bigger curiosity payments, and governments will battle with mounting debt-service burdens.
Backside line
For me, the dangers are beginning to stack up. That doesn’t imply Barclays isn’t an excellent enterprise, or that its shares can not go greater within the quick time period. However it does recommend the very best of the interest-rate windfall might already be behind us.
Traders chasing the rally ought to keep alert to the lagged results of upper charges, which can finally present up in credit score losses, slower deposit development, or weaker shopper sentiment.
For now, I’m impartial on Barclays. It’s a well-managed financial institution, however I see higher risk-reward alternatives elsewhere out there.
