The Barclays (LSE: BARC) share price has enjoyed a strong run in recent months, supported by steady profits, share buybacks, and robust net interest income. Yet, with high mortgage costs and household finances under pressure, investors may wonder whether this momentum can continue – or if optimism is already fully priced in.
Q3 results
Earlier in the week, the blue eagle bank reported a strong set of quarterly results. Group income rose 11% year on year to £7.2bn, driven by a resilient UK business and improving momentum in the US.
Stable deposits and robust UK lending resulted in a surge in net interest income (NII) of 16%, prompting management to raise full-year 2025 NII guidance to more than £12.6bn.
Despite every business division delivering a double-digit return on tangible equity (RoTE), the group RoTE fell from 12.3% to 10.6%. This decline was largely due to two factors:
- An 8% increase in tangible equity (book value), which raises the denominator of the RoTE calculation.
- A one-off impairment of £235m relating to a motor finance provision.
I am not overly concerned about this fall in RoTE, since management is still guiding for a return of more than 12% by 2026.
Structural hedge
The most important driver of NII remains the structural hedge. This smooths income over time by investing customer deposits into fixed-rate instruments.
A key enabler of the hedge is stable customer deposits, which allow the bank to invest a significant portion of this cash into longer-term, higher-yielding assets. Think of it like a jar of cash earning a fixed rate over several years.
At Q3, the total hedge stood at £233bn, with an average duration of 3.5 years and an average yield of around 3.8%. As older, lower-yielding hedges mature, they are replaced by higher-yielding ones. So even if interest rates fall, Barclays has effectively locked in elevated income for several years.
Economic health
In the wake of Covid, governments flooded the UK and US economies with liquidity. Over time, lower-income households have drawn down these excess savings, but wealthier cohorts – who hold a larger share of bank deposits – remain cash-rich.
At the same time, rising stock and property prices have inflated asset values, enabling higher earners to keep spending and propping up demand across the economy.
Banks, for now, sit in what I describe as a ‘sweet spot’: balance sheets are strong, impairments are low, and margins remain wide. But the question is how long this can last.
Each quarter, more borrowers are refinancing debt at higher rates. This gradual repricing is like a slow-moving wave — or even a tsunami — building beneath the surface. Higher mortgage costs will squeeze consumers, businesses will face larger interest bills, and governments will struggle with mounting debt-service burdens.
Bottom line
For me, the risks are starting to stack up. That doesn’t mean Barclays isn’t a good business, or that its shares cannot go higher in the short term. But it does suggest the best of the interest-rate windfall may already be behind us.
Investors chasing the rally should stay alert to the lagged effects of higher rates, which may eventually show up in credit losses, slower deposit growth, or weaker consumer sentiment.
For now, I’m neutral on Barclays. It’s a well-managed bank, but I see better risk-reward opportunities elsewhere in the market.
