Barclays shares surge as the market approves of big giveaways and ambitious targets

There was something for everyone in Barclays earnings report this morning: the Q4 earnings report, a strategy update and a share buyback announcement. The reception to this deluge of news from Barclays has been extremely positive so far. After rallying more than 1.5% on Monday, the stock is up more than 5%, and is at its highest level since September 2023.

The future is very, very bright

Barclays strategic review was punchy, and it essentially boils down to two things: cut costs aggressively and boost profits and continue to return capital to shareholders, to the tune of £10bn by 2026. This is exactly the type of message that shareholders love at the moment, and it is why the market has reacted with glee on Tuesday morning.

Barclays is reorganizing into 5 new operating divisions, with more focus on the retail bank and a wealth management arm. Investment banking will still be one of the five divisions, although with less allocation of capital and in future the IB arm will get 50% compared to 63% currently.

Barclays new financial targets set a high bar: a 12% return on tangible equity. The return on equity in the investment bank was 7% last year, so this division will have the furthest to go to reach this target. The $30bn revenue target for 2026, which is 13% above analyst estimates, is a brave move from Barclays, and the bank has only given itself 3 years to do this. It’s not quite a moon shot, but it does require a laser focus on not only the bottom line, but maximizing revenue opportunities, and building a greater institution than what Barclays is today. However, that will require job cuts, although management were not willing to give a specific headcount target.

As expected, the CEO said that the main aim of its three-year plan is to drive higher returns and ‘predictable, attractive, shareholder distributions.’  The main theme of the Q4 earnings season was shareholder sweeteners, and Barclays is right at the top when it comes to sweet talking shareholders.

Barclays bullish call on the UK

Interestingly, Barclays is also bullish on the UK, saying that the country has come out of covid, and that the Brexit situation has normalized. It wants to be in the UK to ‘do business and from which to do business’, which is a sign that Barclays is not leaving the UK in order to get exposure to Europe. The focus seems to be on its UK and US consumer businesses, and its wealth management arm, which is likely to be a global business.

A weak Q4 23 will give way to a brighter 2026…

The market is willing to forgive Barclays its Q4 revenues and profit misses, especially for its corporate and investment banking unit. This came in at £2.39bn, which is down by 7.2% YoY and was weaker than analyst estimates of a £2.55bn. This was driven by weakness in fixed income revenue, with some of Barclays traders obviously missing the rally in the bond market that we saw in the last three months of last year. Equities revenues were also lower, with the bank attributing the decline to subdued volatility. However, going forward, Barclays investment bank is going to be smaller, and thus less important to earnings, according to management, so a bad quarter is unlikely to get in the way of this share price surge.

The earnings news was also bleak for the last quarter, the company reported a pretax profit of £110mn, down 92% YoY, and much lower than the £354.3mn expected. The hit to profits was mostly from a £1.9bn impairment charge. But there were some bright spots in the report. Investment banking fees rose by 6.3%, consumer, cards and payments also saw higher revenues that estimated. Net interest income, a key metric to watch in bank results, was also higher than expected. It came in at £3.14bn, up 15% YoY, and higher than the £3bn estimated. Added to this, the loan-loss rate was 46 basis points, lower than the Barclays own guidance of 50-60bps. It also has a decent tier 1 capital ratio at 13.8%, which is the upper end of its own guidance, and could protect it from any loan losses if the economy slides into a deeper recession and loan loss rates rise.

Barclays jumped on the buyback band wagon and announced another £1bn in share buybacks, it also announced an 8p dividend, which is higher than 2022’s level.

Watching for Walmart

US markets are open on Tuesday, after Monday’s public holiday. The US consumer will also be in the spotlight today, as Walmart delivers its earnings report for the last quarter. Revenues are expected to increase, but at the slowest pace for 7 quarters, and profits are expected to decline, due to higher labour and product costs. There are plenty of risks to the US consumer, but so far, they have remained solid. Expectations are that they will continue to drive the US economy in the coming year. However, if Walmart’s earnings show any signs that the consumer is slowing down, at the same time as inflation remains a risk to the bottom line, then we could see further weakness in stocks, after the S&P 500 and the Nasdaq recorded a loss for last week.

ECB wage data to determine future rate path

The ECB’s wage rate indicator is due later on Tuesday and this could be a crucial piece of the puzzle to forecasting when the ECB will cut interest rates. A strong reading of wage growth could see the first rate cut, which is currently expected around April, get pushed back to later this year. Wage data has been strong in the Eurozone in recent months, so it would be a shock to the market if this was weaker than expected. The euro could move on the back of this data, it has been weak versus most of the G10 so far this month, although it has made gains vs. the JPY, CHF and the GBP. EUR/USD is down nearly 1% since the start of Feb, so we could see some recovery if the wage data moves the dial for when the ECB will start cutting rates.