Barclays PLC

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

Barclays PLC is a British multinational universal bank that offers a wide range of financial services, including retail, corporate and investment banking, and wealth management.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Barclays’s business has been under scrutiny as of late due to its large number of investment banking positions which are risky for the business. With the addition of its large number of mortgages, the business model is now much riskier.

Business Overview

Barclays operates across various segments, including Barclays UK, Barclays International, and Head Office. Each division contributes to the overall revenue and strategy of the group.

  • Barclays UK: This segment provides retail and business banking services in the UK, such as current accounts, loans, mortgages, and insurance.

  • Barclays International: This encompasses the corporate and investment banking activities, providing services in markets worldwide including the U.S, and also the provision of wealth management services. This segment is a very important profit generator for the business.

  • Corporate Banking: Includes services for corporate clients such as cash management, credit and lending.

  • Investment Banking: Includes services such as financial advice, securities trading, and research for investors.

  • Head Office: Includes all other activities not allocated to the operating divisions.

It’s important to note that Barclays has been selling many of its non-core assets, and focusing on higher revenue generating parts of its business, such as its credit card and investment banking division.

The banking industry is experiencing several shifts, including:

  • Increased competition from both traditional banks and new fintech companies.
  • Rising interest rates and inflation affecting the costs of business and causing increased defaults on debt
  • Changing regulatory landscape, with stricter rules and greater oversight from various regulatory authorities across the world.
  • Increased technology adoption in banking services such as online banking, and digital payments.

Financial Analysis

Barclays’ financial performance is complex and should be carefully assessed.

  • Revenue Distribution: In 2021, Barclays generated £22 billion in total income, with 44% coming from Barclays UK, 46% from Barclays International, and 10% being allocated to Head Office.

  • Margins: In 2021, Barclays had a profit before tax of £8.4 billion and a return on equity of 13.4%, which are signs of good profitability. Cost-to-income ratio was 66%, which shows that the company is spending less than 2/3rds of its revenue in operating expenses, implying good operational efficiency. However, given recent developments, such margins may not be sustainable going forward.

  • Recent Concerns: Barclays’s performance, particularly in its investment banking arm, has been facing some scrutiny. It seems like returns from its investment banking arm has been declining and many suspect it will fall dramatically as the business faces the brunt of the coming recession. The number of loans defaulting has also recently risen, along with an increase in the probability of credit defaults. The rise in the number of mortgages on its books is also a big concern, especially since housing markets are turning for the worst. Many analysts also believe that their current capital base of 15% is not sufficient for the amount of risky assets that the business holds.

  • Management’s View: In the 2021 Annual Report and other investor calls, management has expressed confidence in the diversification and strength of their current business model. Management acknowledged the ongoing uncertainty in the macroeconomic environment, but expressed that it has positioned the company well to face those challenges. However, analysts and investors are mostly skeptical of these positive views.

Moat Analysis

Barclays’s moat can be viewed in the following way:

  • Brand Recognition and Customer Base: Barclays enjoys strong brand recognition in the U.K and Europe. Its huge customer base provides a steady flow of revenue.
  • Scale: Barclays has enormous scale in its business and a very diverse portfolio of services. It also has a huge trading division for its investment banking arm.
  • Regulation: The regulatory burden on the banking industry often creates barriers to entry for new competitors which protects incumbents like Barclays from competition.
  • Switching Costs: Banks tend to enjoy a high level of switching costs because of the complexity involved in moving large financial accounts to other banks and the risk associated with switching.

Moat rating: 2/5. While Barclays is a very large and reputable brand with a strong customer base and some structural advantages from regulation and high switching costs, its high risk and large exposure to the fluctuations in the market and the global economy significantly impacts the moat. While certain divisions of the business seem well-positioned for future growth, the future of other important divisions is in question.

Risks

Legitimate risks that could harm Barclays’s moat and business resilience include:

  • Economic Downturn: A global recession or economic downturn could reduce loan demand, increase credit defaults, and reduce trading and investment activity.

  • Regulatory Changes: Stringent regulations or other regulatory measures could potentially increase operating costs and restrict future growth prospects.

  • Competition: Increase in competition from non-traditional lenders and new technological innovations can pose challenges to maintaining market share.

  • Increased debt: Given the large portion of mortgage and leveraged finance assets on its books, the business has high exposure to the downside and is vulnerable to a change in interest rates.

  • Operational Failure: Any technological faults or cybersecurity issues with the banks infrastructure can erode trust in the bank.

  • Financial Instability: Banks are inherently unstable given the nature of their businesses. Any news reports about the decline of Barclays can cause a run on the bank and a sharp decline in stock value.

Understandability

The banking industry is extremely complex and difficult to understand for the casual investor, but given the nature of Barclay’s business model being a universal bank and having a wide range of services, it is not particularly difficult to understand what the business does or how it produces revenue.

Understandability rating: 4/5.

Balance Sheet Health

Barclays’s balance sheet health can be viewed in the following way:

  • Capital Ratio: The banks common equity tier 1 ratio is at 14.0%, which is slightly concerning given the macro and financial instability.
  • Debt to Equity ratio: The debt to equity ratio in 2021 was about 78% and is likely going to increase given its high reliance on debt finance.
  • Liquidity: The bank has a strong liquidity position and significant access to sources of debt for funding.

Balance Sheet Health rating: 3/5. Although its debt to equity ratio is quite high, its liquidity remains strong for now. However, it’s very clear that its exposure to market risk and leverage makes the balance sheet very shaky and vulnerable.