Picture supply: Getty Photos
The Barclays (LSE: BARC) share value has loved a robust run in current months, supported by regular earnings, share buybacks, and strong internet curiosity earnings. But, with excessive mortgage prices and family funds beneath strain, buyers could 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 robust set of quarterly outcomes. Group earnings rose 11% 12 months on 12 months to £7.2bn, pushed by a resilient UK enterprise and enhancing momentum within the US.
Steady deposits and strong UK lending resulted in a surge in internet curiosity earnings (NII) of 16%, prompting administration to lift full-year 2025 NII steering 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 resulting from two components:
- An 8% improve in tangible fairness (e-book worth), which raises the denominator of the RoTE calculation.
- A one-off impairment of £235m regarding 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
A very powerful driver of NII stays the structural hedge. This smooths earnings 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 property. Consider it like a jar of money incomes a hard and fast fee over a number of years.
At Q3, the whole hedge stood at £233bn, with a mean length of three.5 years and a mean 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 earnings 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 identical time, rising inventory and property costs have inflated asset values, enabling increased earners to maintain spending and propping up demand throughout the economic system.
Banks, for now, sit in what I describe as a ‘sweet spot’: stability sheets are robust, impairments are low, and margins stay huge. However the query is how lengthy this could final.
Every quarter, extra debtors are refinancing debt at increased 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 wrestle 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 increased within the brief time period. But it surely does counsel the perfect of the interest-rate windfall could already be behind us.
Traders chasing the rally ought to keep alert to the lagged results of upper charges, which can ultimately present up in credit score losses, slower deposit development, or weaker client sentiment.
For now, I’m impartial on Barclays. It’s a well-managed financial institution, however I see higher risk-reward alternatives elsewhere available in the market.
