Barclays Bank

Following nearly a decade of lacklustre performance within the banking sector, blue chip banks have been a significant contributor to the recent strong performance of UK equity markets. Shareholders of retail-focused names such as Lloyds and NatWest experienced returns exceeding 30% as of June this year but Barclays has lagged and remains the cheapest FTSE 100 constituent bank across various metrics.

Barclays stands out among UK-listed peers for the scale of its investment bank, in that it generates the largest proportion of revenue and remains a top-ten-ranked name. Under former CEO Jes Staley’s strategy outlined in 2015, the bank returned focus to core operations within the UK and US, exiting African operations, retail banking outside of the UK, and private banking operations outside of the key hubs of the UK, Monaco, and Geneva. Within the investment banking business, further focus was retained on core activities within London and New York, with an aim to increase profitability levels.

Fast forward to today and the focus on building a simpler and more focused bank remains, with a new three-year plan recently outlined. The organisational structure has been simplified with five reporting divisions and focus remains on rebalancing the bank’s risk capital to higher returning business lines, aiming to reduce the proportion allocated to the investment bank to 50% by 2026. More recent activity includes the acquisition of Tesco Bank in 2024, a partnership with General Motors in the US, and the launching of a new tiered savings product. In addition to reallocating risk capital, the bank seeks to achieve £1bn in cost efficiency savings by 2026, reducing the cost-to-income ratio into the high fifty percent range.

In the 2024 financial year, the highest returning segments of the bank were found in the UK, with strong performance across Barclays UK, the UK corporate bank, and private bank wealth management. Profitability within the investment bank remained underwhelming and below target, with a similar experience within the US consumer banking division.

In relation to UK retail bank NatWest, UK segment returns within Barclays were in line, if not better. Overall levels were lower, however, due to the investment bank and US corporate bank diluting group profitability with Barclays reporting returns on tangible equity of 10.5% against 17.5% for NatWest. Within first quarter results for the 2025 financial year, Barclays indicated strong performance within the investment banking division with market volatility aiding revenue generation for the fixed-income, currencies and commodities trading business. Overall group profitability was higher as a result, but results highlight the volatility associated with the investment banking business and requirement to diversify returns across more stable business lines such as mortgages and credit cards.

A more obscure area of revenue growth within the bank occurs within the treasury department, where the bank’s money and financial risks are managed. The department’s structural hedging activity involves reducing the risk of mismatches that occur between the banking book of assets and liabilities. To do so, the department utilises interest rate swaps, receiving a fixed rate in exchange for paying a floating rate of interest. These products offset the variable interest rate exposures of qualifying products within the banking book to both smooth income and protect against unexpected falls in interest rates. As a result of increased interest rates, the activity aids in generating additional revenue as legacy low return hedges expire and are replaced with new contracts at higher fixed rates of interest. In financial year 2024, the activity generated revenue contributions of £4.7bn, up from the £3.6bn generated in financial year 2023.

While the bank continues to drive profitability, shareholders have been rewarded with increased dividend distributions and a plan to return at least £10bn to shareholders through a combination of dividends and share buybacks by 2026. Total dividends of £1.2bn are expected to remain consistent on an absolute basis through to 2026, with dividends per share increasing due to a reduced share count given previously mentioned buybacks.

Despite improving profitability, cost control measures, and shareholder distributions, at the time of writing Barclays continued to trade at a discount to the recently reported 372p tangible net asset value per share while UK-listed peers such as Lloyds, NatWest, and Standard Chartered all trade at premium ratings. To replicate the premium valuation, we can reasonably require the returns on equity of the bank to exceed the cost of equity. With consistent improvements in profitability hard to come by within the investment bank, successful redistribution of risk capital to other areas feels to be a necessity through the three-year strategy to 2026.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance. The information and views were correct at time of publishing but may have changed at point of reading.