Barclays

Barclays reported a good second quarter with total income growing 16% to GBP 8.3 billion compared with last year. Good growth in the UK businesses and a strong performance in equities stood out.

Why it matters: Growth in prime financing balances and equity derivatives drove an outstanding 45% income increase in equities for Barclays. However, a flat performance in fixed income (up 1%) disappointed given strong results of peers in this area. The UK businesses performed well, supported by loan and deposit growth as well as the structural hedge benefit that continued to contribute. However, mortgage margins remain under pressure, a feature of the UK's high competition in the low loan-to-value mortgage segment. 2026 income guidance was lifted to GBP 31.5 billion from GBP 31.0 billion previously as a result of the good quarter and positive outlook for the rest of the year.

The bottom line: We raise our fair value estimate to GBX 510 per share from GBX 435, primarily driven by modeling better investment banking performance and stronger growth in the Barclays US consumer business. Our no economic moat rating is unchanged. We now believe that we had previously been too cautious in Barclays' ability to drive structural income growth while restraining risk-weighted capital deployment in this segment. We expect Barclays to capture structural hedge income benefits beyond 2028 given the current swap yield curve. We don't expect mortgage margin pressures to abate materially but anticipate some relief from Barclays' push into higher-yield mortgages via the Kensington brand.

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Our fair value estimate is $27.10 per share and corresponds to a multiple of 1.2 times 2026’s tangible book value.

We expect net interest margins in the UK to peak in 2028 at 390 basis points versus 363 basis points in 2025. We anticipate that the structural hedge will drive margins up again, more than offsetting pressure on deposit and product margins. We model for impairment losses of 65 basis points in the medium term and pencil in loan growth of 4%. Our cost/income ratio, as we calculate it, including litigation and conduct costs, drops from 61% in 2025 to 54% by 2028. Our midcycle return on tangible equity is 12.6% versus a cost of equity assumption of 10.6%.

We do not believe that Barclays has a durable competitive advantage allowing the bank to consistently outearn its cost of equity. Its ring-fenced UK retail operation benefits from a cost advantage as a result of cheap deposit funding, but we don’t think that this translates to an advantage large enough at group level to warrant a narrow moat rating. More than half of Barclays’ risk capital is held within its investment bank, which we don’t view as competitively advantaged. Moreover, the investment banking exposure increases our cost of equity estimate, increasing the hurdle rate for Barclays to generate economic profits.

We believe that Barclays UK, Barclays’ retail bank in the UK, benefits from a deposit funding-based cost advantage. Four large banks—Barclays, Lloyds, Natwest, and HSBC—hold the majority of retail current account deposits (noninterest-bearing or low-interest-bearing accounts) in the UK. While both household and corporate lending is competitive, the ability to earn a spread on the funding side sets these four banks apart.

Despite the launch of a customer current account switching service in 2013, the dominance of the large four UK banks controlling the majority of deposits has not changed materially. We believe that the large four banks in the UK benefit from scale and scope advantages that improve unit economics of owning and attracting deposits. Paired with low incentives to switch (i.e. product homogeneity across the industry), we believe a large portion of the deposit funding controlled by the four large UK banks is sticky.

As of the first half of 2025, Barclays’ structural hedge includes GBP 182 billion of noninterest bearing and low-interest bearing deposits that display sticky and structurally stable characteristics. This covers about 13% of Barclays’ total funding requirement compared with 32% at Lloyds and 33% at Natwest. About 85% of these deposits deployed in the structural hedge sit within Barclays UK.

The Barclays UK segment is legally ring-fenced from the corporate and investment bank, as is required for all UK banks with assets above GBP 25 billion to protect depositors. As a result, Barclays is limited in using its deposit funding advantage fully across the entire group.

The UK banking regulatory environment encourages new entries into the banking space, as is evidenced in the relatively high issuance of banking licenses in the UK. That said, growing a bank from mid-tier to a large UK bank is difficult as capital and funding rules are tilted to the advantage of large-scale players. Banks with assets above GBP 40 billion are required to issue costly bail-in debt, which disproportionally disadvantages smaller challenger banks. Large UK banks also find it easier to spread the costs of operating internal risk-based models across their business compared with smaller banks. The advantage of running an internal risk-based model can be substantial, allowing a bank to apply lower risk weights to asset classes for which it can show that standardized risk weights would have overcapitalized the bank through the last full credit cycle. Challenger banks often do not have a track record spanning a full credit cycle that could be used to build these advantaged risk models. Lastly, ring-fencing rules prevent large non-UK banks from quickly gaining scale within the UK. Any UK retail bank with assets above GBP 25 billion is required to be its own separate entity, with its own operations and infrastructure, and its own funding and capitalization.

Barclays’ investment bank has a good position globally in fixed income trading but lacks the scale and scope relative to large US investment banks. Barclays also sits at the lower end of the top 10 rankings for fee-based investment banking income streams such as advisory that are less volatile, tend to exhibit wider margins, and are less capital-intensive. Its high dependency on trading income (about half of the investment banking’s income is derived from trading), which can be volatile, coupled with the higher capital intensity of operating a large trading book, weighs on the durability of profits in this segment.

Material value destruction is possible. Beyond any bank’s risk of running into a liquidity crisis, Barclays’ fixed-income trading and prime brokerage services expose the bank to potentially severe losses. Barclays takes on balance sheet and counterparty risks in these businesses. Although profitable, just a couple of missteps in these businesses can result in asset write-offs ripping a hole into the bank’s capital, reducing investor and client confidence, and starting a downward spiral that is hard to stop once set in motion. The likelihood of such losses is low, but the outcome is severe.

Thanks to a reduction in risk-weighted assets, Barclays’ capital ratio has improved over the years.

Barclays’ has a strong place in the UK retail banking business with healthy shares of personal accounts and leadership position with Barclaycard.

Its improved capital ratio allows Barclays to distribute excess capital to shareholders including share repurchases.

Improved performance in its investment bank does not compensate for the high capital intensity in this business.

The cyclicality of the investment banking division will remain a detractor from earnings quality.

With the retail and investment banking segments ring-fenced, the strategic positioning of Barclays is unclear.