Shares of Barclays (LON:BARC) are having a much worse year than their FTSE 100 comrades – Lloyds, HSBC and NatWest. And as headwinds build, further falls could be imminent.
Barclays share price: earnings under pressure
Barclays’ annual profit of £6.38bn in 2021 was almost four times the £1.53bn made in 2020 at the height of the covid-19 pandemic. And with the grip of the coronavirus on the global economy waning, former CEO Jes Staley had enthused that “huge pent-up demand” would trigger a robust economic recovery for Barclays in 2022.
However, the FTSE 100 bank made a self-imposed regulatory error, which saw it sell $15.2 billion in structured notes more than it was entitled to under its SEC registration. He is now forced to buy back the oversold tickets at their original price, resulting in a loss of £450million after tax.
With a top shareholder selling $1.2bn of Barclays shares and its £1bn share buyback postponed until the second quarter, CEO CS Venkatakrishnan will likely try to draw a line under the blunder. But Barclays’ woes are far from over.
Russia’s invasion of Ukraine sent energy and commodity prices spiraling to multi-year highs. Meanwhile, China’s rigid enforcement of its “zero-covid” strategy has seen tens of millions return to lockdown, including in the world’s busiest city, Shanghai. And Beijing could be next.
JP Morgan CEO Jamie Dimon believes recession is “absolutely” a possibility as the impact of decades-high inflation and geopolitical issues continue to cause economic shocks. According to the Office for National Statistics, 90% of UK households have reported an increase in the cost of living this year, and 25% are struggling to pay their bills.
Additionally, Barclays is now taking the rising cost of living into account when deciding how much to offer mortgage borrowers. The tightening of lending criteria will see the bank lose highly profitable loans, as property prices soar to record highs amid rising interest rates.
In addition, the bank released billions of pounds of loan loss provisions in 2021, believing the high risk of mass defaults was over. But now Barclays and its competitors are bolstering that defense. Barclays alone is expected to set aside up to £299m for bad debts, up from £55m a year ago.
Earnings could also be dampened by the collapse of the investment banking boom. According to the London Stock Exchange, 2021 has been “a year of opportunity”, with more than 120 London IPOs generating £16.8bn. It was its best year since 2007, just before the financial crash.
But according to EY research, UK markets saw a ‘significant decline’ in the first quarter of 2022, having raised just £397m, down 93% from £5.6bn in the first quarter of 2022. first quarter of 2021.
And it’s a similar story across the pond. U.S. peers JP Morgan, Goldman Sachs, Morgan Stanley and Citi all saw first-quarter profits nearly halve in the first quarter.
Cumulatively, these headwinds mean that average data from analysts at Refinitiv estimate Barclays’ first-quarter profits will fall 45% to £1.32bn.