Hot on the heels of HSBC on Tuesday, Barclays (LSE: BARC) reported record profits for 2021 on Wednesday. As a new CEO takes over, the economy continues its recovery from Covid, and interest rate rises loom, the Barclays share price could be about to surge. So, is it a company I would add to my portfolio today?
A not-so-traditional bank
As a major clearing bank with a significant, if diminishing, presence on the high street, Barclays provides all the bog-standard services that one would expect of a bank, including loans, mortgages and savings.
Beyond conventional banking, it has a diversified business model. It is the sixth largest investment bank and the largest outside the US. It also operates a very successful credit cards business and payments system. Together, these operations helped deliver record profits before tax of £8.4bn in 2021.
What attracts me to Barclays is the sheer breadth of its business model. It is able to benefit throughout different phases of the macro-economic environment. This explains why its share price recovered so much faster than its rivals since March 2020.
While interest rates remained at near zero throughout 2021, it was able to maintain margins through its investment banking proposition as trading activity soared. Today though, as interest rates begin to rise, net interest income (NII) will provide more traditional sources of revenue. It estimates that for every 0.25% rise, NII will improve by £500m. In addition, its latest spend data from Barclaycard shows that debit and credit spend in January 2022 was up 7.4% on January 2020 (that is, pre-pandemic).
Maintaining its competitive position
In the past 10 years, the banking landscape has been completely transformed. Digitisation has been at the forefront of this revolution. Today, customers want a seamless and efficient method of interaction in all aspects of their lives and banking is no different. So, as branch visits continue their downward trend, Barclays is signing up 11,000 new customers to its mobile app each week.
Delivering next-generation financial services, requires a huge investment to upgrade legacy systems and move operations to the cloud. Digital-native firms (the so-called Fintechs) are pushing hard and chipping away at margins in more lucrative parts of financial services, particularly payments. The bank has already invested over £500m to realise value from its payments’ platform.
Investing in modernising its legacy infrastrucutre doesn’t come cheap. Although its cost: income ratio is falling and heading for its target of 60%, a deterioration in economic conditions would inevitably lead to its reversal and have a knock-on effect on its modernisation strategy. Although I see Covid as a small risk, rising geopolitical tensions in Russia could hit consumer and business confidence. A weakening economic landscape would lead to revisons to calculated impairment costs thereby hitting profits.
One of the key pillars I see for future growth is providing funding to businesses developing green products and services. In the last three years, the amount of green loans and bonds has risen 291%. As it accelerates, thousands of start-ups will require capital to make this transition a reality. Such an opportunity represents the long-tail of trillions of dollars in investment capital. I believe this would have a positive effect on the long-term share price of Barclays.
Given all of the above, together with the sell-off across the broader equities market today, I intend to snap up some more shares.