Barclays has delivered strong profit growth although bad debt charges at Barclaycard are a worry.
Barclays
(LSE: BARC)
gave further insight this morning into whether the bank can sustain its sector-beating share price performance with a third-quarter trading statement. As predicted, most areas of the bank contributed excellent performances, with the full year results expected to be "in line with current market consensus", according to Chief Executive John Varley.
However, things don't look so good at Barclaycard, the credit card division that accounts for around 10% of profits, and which earlier this year reported a fall in profit due to rising bad debt charges. The bank didn't divulge numbers in today's trading statement, but said that growth in income was "more than offset" by rising impairment charges for bad debts, implying that profits will have fallen again in this area.
With impairments being somewhat at the discretion of directors to declare, it remains to be seen whether other companies are willing to report smaller profits now to avoid nasty surprises for shareholders in the future.
The performance of the bank's core areas, Barclays Capital and UK Banking, which together account for more than half of group profits was described as "strong" in the statement, with profit margins being maintained, providing encouragement that Barclays is performing well in the areas that contribute most to the bottom line.
The bank is taking advantage of low commercial property yields by continuing its program of property disposals with the Finance Director confirming this is an investment rather than financing decision. Given the exuberance shown by retail and professional investors keen to invest in commercial property, it will be interesting to see who made the right call. Personally, my money is on Barclays, which is exiting a notoriously cyclical industry at what may well be close to its peak, and can redeploy the cash released from sales into higher yielding fields.
With Barclaycard being the largest UK credit card issuer, it has larger total exposure to unsecured lending than other banks, although with fingers in many other pies, the effect of the unsecured debts should not weigh too heavily against the group as a whole.
The burden may be shifted down the market onto sub-prime lenders who lend exclusively to people more likely to default. It remains to be seen whether stronger lending criteria are being maintained by banks and lenders to reduce their exposure to bad debts, or if the rush for market share in unsecured lending will leave more shareholders nursing burnt fingers.
The market responded to the results by marking the shares up by 1.5p to 689.5p.
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