Barclays: Will FTSE Bank Benefit From Economic Recover?

Banking is a cyclical industry. The COVID-19 pandemic was initially expected to lead to an increased number of bad loans. Therefore, banks set aside significant amounts of money for potential losses. Meanwhile, low-interest rates have also been straining profits. With low rates, a bank makes less money on its lending, while profit margins on the loans provided get squeezed.

On Feb. 18, Barclays released the full-year 2020 results. The bank reported a full-year profit of £3.1 billion ($4.4 billion) on an income of £21.8 billion. Analysts had been expecting pre-tax profits of £2.8 billion ($3.9 billion) on an income of £21.6 billion ($30.4 billion). Full-year profit was down 30% compared with 2019, but revenue grew slightly. The 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 released strong metrics in its corporate and investment bank, which saw income rise 22% and profits increase 35%. As a result, the effect of the sharp incline in impairment charges was less than feared. Put another way, the diversified business model helped the company face the challenges of 2020.

As management highlighted , the bank:

"remained profitable every quarter in 2020, with a significantly increased impairment allowance, strong capital and a highly liquid balance sheet."

The bank also announced it would restart dividend pay-outs after the Bank of England had stopped banks from paying dividends or excessive bonuses last year to encourage lenders to build cash reserves to cover potential losses.

Although the results were better than expected, shareholders initially turned away from Barclays following the results. Given the increased volatility in the markets, investors could continue to focus on the COVID-related economic worries and bad debt.

The bank has set aside another £492 million ($692 million) to cover potential losses in the final quarter of 2020, taking total provisions for the year to £4.8 billion ($6.75 billion). Low net interest margin is also an ongoing concern. UK interest rates could drop into negative territory later this year. This would further put pressure on revenues.

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Bottom Line

Despite a drop in its share price in recent months, 2021 may have a brighter outlook for the Barclays compared to its 2020 result. Recent announcements by the UK government show that the economy will gradually open up as the vaccine rollout continues. The summer months may become a turning point for the economy as a whole, as individuals resume regular spending and companies can continue to trade again.

The dividend resumption could also become important. It is only a small start but could attract income investors back to the share price. Historically, banking stocks offered attractive dividend yields. If this returns, Barclays shares might benefit. Therefore, interested investors could consider buying the dips.

Those investors who do not want to commit capital into a single bank but are interested in the shares of financial institutions could also consider buying an exchange-traded fund (ETF). Examples would include:

• iShares Global Financials ETF (NYSE:IXG) – up 10.4% YTD;
• SPDR® S&P Bank ETF (NYSE:KBE) – up 22.5% YTD;
• SPDR® S&P Regional Banking ETF (NYSE:KRE) – up 27.9%.

Written By: Investing.com