The Barclays (LSE: BARC) share price rallied yesterday after the company reported its interim results. In fact, the stock is up 2% today. The share price has risen over 20% since the beginning of 2021 and more than 65% in the last 12 months.
I’ve placed Barclays shares on my watch list for now. I wouldn’t buy just yet, and here’s why.
Clearly the market has viewed the bank’s interim numbers favourably. At the headline level, total income for the six-month period fell by 3% to £11.3bn. But the real gem was that profit before tax surged to £5bn from £1.3bn a year ago. The bank smashed the consensus profits forecast of £4.1bn.
Performance was helped by its investment banking unit. Merger and acquisition deals as well as the plethora of stock market flotations have helped. Income from its equities business soared by 38% to £1.7bn.
Profits for the half year were also helped by the fact that it had a credit impairment release of £742m. This is due to the improving economic environment and low defaults on unsecured lending.
What I found encouraging is that its financial strength has improved. For banks, this is measured by the common equity tier 1 (CET1) ratio. Barclay’s came in at 15.1%, which was in line with December 2020. At least this hasn’t deteriorated and has remained stable.
For me, the icing on the cake was the the announcement of increased capital distribution to shareholders. Barclays has decided to reward its patient stockholders with an interim dividend of 2p per share to be paid in September. Let’s bear in mind that this time last year, there weren’t any income payments.
Also, it’s carrying out a share buyback of up to £500m as well. What this means is that investors who didn’t receive a payout for most of 2020 due to the Bank of England’s Covid-19 restrictions, are now in line for a mammoth income return. I bet investors aren’t complaining too much.
This is all well and good, but I do have a few concerns about the Barclays share price. The first one is that the bank has said that the intended share buyback “would have an effect of 17bps on the CET1 ratio”. So it’s keeping shareholders happy at the expense of its financial strength. While this may only be a small hit, it makes me somewhat uneasy.
It has also highlighted that total costs for 2021 are expected to be above those of 2020. It blames this on higher structural and performance costs. This is likely to hit profitability at the full-year level, which could impact the Barclays share price.
Things are clearly improving and Barclays appears to heading towards pre-pandemic levels. But I’m not ready to dip my toe in just yet. I reckon yesterday’s price surge was due to the reinstatement of the interim dividend. But let me be frank, most banks are heading in this direction anyway.
I’ve placed the stock on my watch list and will be paying close attention.
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Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.