Over the past five years Barclays (LSE: BARC) shares have more than trebled in price. The primary driver for improving fundamentals has been a widening gap between the interest the bank charges its borrowers compared to that paid out to savers. After selling out of my holdings a couple of months back, I’m wondering if I made a mistake.
H1 results
Total income for the blue-eagle bank surged 12% to £14.9bn in H1. Apart from its US consumer bank division, every business unit reported double-digit revenue increases. The standout performer was its investment banking division, which accounted for nearly half of all income.
Profit at the investment bank was up 25% year on year, as the announcement of tariffs back in April led to a spike in volatility across equities, fixed income and commodities markets. However, it wasn’t all plain sailing in that division as corporate deal-making continued to be weak as a result of concerns over the health of the US economy.
Structural hedge
Seasonal deposit volume in current accounts continued to be strong. This is extremely important to the bank because it helps to support longer-term stability via the all-important structural hedge.
The purpose of the structural hedge is to smooth net interest income over the peaks and troughs of the interest rate cycle.
Regardless of the future movement in interest rates, the bank has now locked in £11.1bn of income out to 2026. This is up 20% on the same time last year.
As long as deposit volumes remain robust the bank will be able to roll over more of its hedges as they mature, thereby compounding gains in the future. Over the next 18 months it’s estimating that 90% of approximately £100bn in hedges will be rolled over. The maturing yield on these assets is expected to be around 1.5%.
Impairments
Despite a stellar set of results, there was one major fly in the ointment. Credit impairment was up 24% to £1.1bn. That’s a huge jump.
At the beginning of the year, Barclays’ economic models were all pointing towards strong economic indicators. Then tariffs hit. That forced it to apply some post-model adjustments to reflect heightened uncertainty in the US.
My biggest concern remains the health of the US economy. The bank isn’t reporting any elevated delinquencies among credit card holders and the employment figures remain strong. But still I’m not convinced.
Under the bonnet, the US consumer looks really stretched. Luxury spending growth has dried up and the housing market has seen some big declines in certain states. Inflation has altered consumer spending patterns and shopping for basics has become a priority for many. That’s before I even look at the mammoth and growing government debt mountain.
In 2025 the US dollar has had a tough time. Some 40% of Barclays’ group income is in dollars, and the bank reported that its continued weakness impacted profitability.
There’s still a lot to like about Barclays. Another £1bn tranche of share buybacks should help to fuel increasing earnings per share. But the huge sell-off in the stock in April highlight how quickly circumstances can change. For me, with so much economic uncertainty, it’s too risky a play for me to consider, and therefore I won’t be buying back in.
