Barclays prepares £3.7bn emergency funds to deal with full impact of COVID-19

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International banking giant Barclays has set aside £3.7bn to cover possible loan losses caused by the impact of COVID-19 on the business.

The coronavirus crisis has devastated consumers and businesses across the UK, and Barclays – like many banks – has been a the centre of keeping many going through these difficult times.

The bank’s latest financial results showed that it has set aside £1.6bn to cover bad debts during the second quarter – May-June – the height of the COVID-19 enforced lockdown. Credit impairment charges and loan loss provisions during the same time period hit £200m, and the group’s pre-tax profit for the first half of the year fell to £1.3bn. This is compared to £3bn in the same period last year.

A statement from Barclays read: “Our consumer business income decreased by 11% in Barclays UK and 21% in CC&P (consumer, cards and payments) as a result of the lower interest rate environment, fewer interest earning balances, reduced payments activity and action to provide support for customers”.

Barclays has accepted more than 600,000 payment holidays up to the end of July and has provided £22bn of funding including 250,000 government-backed CBILS worth more than £7.5bn.

Barclays’ Chief Executive Jes Staley told investors: “Although we will remain well capitalised and ahead of our minimum requirements, we may experience stronger capital headwinds in the second half of the year. The Board will decide on future dividends and capital returns at the year-end 2020. While the remainder of 2020 will be challenging, our diversified model means we can remain financially resilient and continue to support our customers and clients.”

Industry reaction

Barclays reported an 8% increase in total income in the first half, reaching £11.6bn, driven by an 86% increase in income from trading activities. However, a big step up in provisions for bad loans meant profit before tax still fell 58% to £1.3bn.

The bank’s CET1 ratio, a key measure of a bank’s balance sheet health, rose from 13.8% at the start pf the year to 14.2% at the end of the first half. That reflects profit generated during the half and the non-payment of dividends.

Nicholas Hyett, Equity Analyst at Hargreaves Lansdown said: “These results aren’t exactly unexpected, but they paint a pretty bleak picture of the UK economy nonetheless – particularly if you happen to be a business owner.

“Consumers are clearly staying at home, with Barclaycard’s UK credit balances have fallen 21.8% in the first half with overdrafts down too. It’s tempting to see increased financial resilience among consumers as a positive, but it also means tills aren’t ringing and the money which is the lifeblood of the UK economy is stuck in our wallets. Meanwhile Barclays’ business customers have been leaning heavily on the bank.

“Barclays UK highs street business has seen loans to businesses rise by 31.4% in the first half, and while a lot of the risk associated with these loans is underwritten by the UK government through various coronavirus relief schemes it’s an indication of the severe stress many small businesses are under. Even the larger businesses serviced by the Corporate and Investment Bank have been calling on the bank for extra cash.

“Given the backdrop a large increase in provisions for bad loans during the half was to be expected – and Barclays now expects disruption to drag well past 2020. For the high street business bad loan provisions are clustered in the credit card business, always a riskier area for lenders, but the bank also anticipates some large losses from its large corporate customers.

“Barclays itself has done better than expected this quarter, with capital levels relatively strong and a very good performance from the investment bank. Volatile financial markets are ideal conditions for banks’ trading desks, as customers trading volumes and hedging activity increases. Meanwhile the glut of companies turning to financial markets for support, whether that’s through debt or issuing new shares means a hefty pay day for Barclays. This natural hedge is one of the advantages of Barclays ‘Universal Bank’ model, but the boost will be short lived and if the economy slides into a prolonged recession Barclays investment bankers won’t escape the pain.”

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