Is the time to show more confidence in major British banks, such as Barclays (LON 🙂 (NYSE :), a member?
With operations in more than 50 countries, it has a global reach. In the past year, BARC shares are down about 7%. However, year-to-date (YTD), they have returned about 8%. On February 25, BARC shares closed at 162.54p ($ 9.08).
Banking is a cyclical industry. Initially, the COVID-19 pandemic was expected to lead to an increase in bad loans. Therefore, banks set aside significant amounts for potential losses. Meanwhile, low interest rates have also put pressure on profits. With low interest rates, a bank earns less money from its loans, while the profit margins on the loans provided are under pressure.
Recent Results
On February 18th, Barclays released the full year 2020. The bank reported annual profit of £ 3.1 billion ($ 4.4 billion) on income of £ 21.8 billion. Analysts had expected pre-tax profit of £ 2.8 billion ($ 3.9 billion) on income of £ 21.6 billion ($ 30.4 billion). Full year profit was 30% lower than 2019, but sales grew slightly. Quarterly net profit fell to £ 220 million (US $ 308.27 million) from £ 681 million (US $ 954.24 million) a year earlier.
The FTSE 100 member published strong statistics in his corporate and investment bank, which saw income increase by 22% and profits by 35%. As a result, the effect of the sharp increase in impairments was less than feared. In other words, the diversified business model helped the company meet the challenges of 2020.
As management stressed, the bank:
"Remained profitable quarterly in 2020, with a significantly higher provision for impairment, strong capital and a highly liquid balance sheet."
The bank also announced that it would resume dividend payments after the Bank of England last year prevented banks from paying dividends or excessive bonuses to encourage lenders to build up cash reserves to cover possible losses.
Although the results were better than expected, shareholders initially turned away from Barclays after the results. Given the increased volatility in the markets, investors may continue to focus on the COVID-related economic concerns and bad debt.
The bank has set aside an additional £ 492 million ($ 692 million) to cover possible losses in the last quarter of 2020, bringing total provisions for the year to £ 4.8 billion ($ 6.75 billion) . The low net interest margin is also an ongoing concern. UK interest rates could fall into negative territory later this year. This would put further pressure on revenues.
Bottom Line
Despite a decline in the stock price in recent months, 2021 may have a better outlook for the Barclays compared to 2020 results. Recent announcements from the UK government show that the economy will gradually open up as vaccine introduction progresses . The summer months can become a turning point for the economy as a whole as individuals resume regular spending and businesses can continue to trade.
The resumption of the dividend could also become important. It's just a small start, but it could attract income investors to return to the stock price. Historically, bank stocks have offered attractive dividend yields. If this returns, Barclays stock could benefit. Therefore, interested investors might consider buying the dips.
Investors who do not want to invest capital in one bank, but are interested in the shares of financial institutions, may also consider purchasing an exchange-traded fund (ETF). Examples are:
iShares Global Financials ETF (NYSE 🙂 – 10.4% higher on YTD;
SPDR® S&P Bank ETF (NYSE 🙂 – increased 22.5% YTD;
SPDR® S&P Regional Banking ETF (NYSE 🙂 – up 27.9%.
