Financial Impact of Brexit on Barclays

This assignment analyzes the financial effects of Brexit on Barclays Bank. It examines key financial indicators like profitability and liquidity, exploring how Brexit-related uncertainties impacted these metrics. The analysis also assesses the risks posed by Brexit to BCS and evaluates its strategic response, including expanding operations in Ireland as a contingency plan.

Banking Theory and
Practice

TABLE OF CONTENT
A. BACKGROUND..............................................................................................1
B. OBJECTIVE OF THE CASE STUDY..................................................................1
C. FINANCIAL DATA OF CHOSEN UK COMMERCIAL BANK.................................1
D. EVALUATING FINANCIAL MEASURES TO MEET THE OBJECTIVES..................2
E. ANALYSIS OF THE FINANCIAL MEASURES WITH DIAGRAMS.........................2
F. CRITICAL ASSESSMENT OF THE IMPACT OF BREXIT ON BANK’S
PERFORMANCE AND RISK................................................................................4
REFERENCES....................................................................................................5

A. BACKGROUND
Brexit abbreviated for British Exit which states that on 23rd June 2016,
brexit voted to leave its EU membership. On the date, UK won the decision
by 51.9% vote who favored UK separation from EU. England and Wales also
supported the exit with 53.4% and 52.5% vote while North Ireland and
Scotland favored staying in EU with just 44.2% and 38% vote (Hunt and
Wheeler, 2018). Leaving EU simply means minimizing excessive dependence
on the EU law with which Britain agreed before. Euroskepticism due to poor
performance of the European economies after the period of crisis in 2008
was the main reason behind the exit. Brexit had two sided impact on the UK
economy both positive and negative. After referendum, Britain can now
develop its own regulative regime and there is no need to follow EU law, on
the contrary note, devaluation of currency was the major consequences
resulted due to Brexit (Lee, 2016).
B. OBJECTIVE OF THE CASE STUDY
Barclays Plc is one of the leading multinational banks of UK that is
listed on LSE and NYSE. It operates globally and offer personal banking,
investment banking, wealth management and credit card facilities. The
primary objective of the case study is to examine how brexit had affected
the financial service sector of UK with specific focus on the chosen bank,
Barclays Plc. It will be done through examining the impact on profitability
performance of the selected bank. Apart from this, it will also focus on
liquidity risk because Bank of England (BOE) had warned that brexit
uncertainity could lead to credit crunch for UK banks.
C. FINANCIAL DATA OF CHOSEN UK COMMERCIAL BANK
All the financial data set of the Barclays Plc (BCS) has been extracted
from its annual report because it is most credible source of information that
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prove authenticity of the data collected. Financial data about profitability
measures through ROA and ROE is presented below:
2017 2016
Net interest income 6086 6048
Net interest margin 3.49% 3.62%
Cost to Income Ratio 66% 65%
Net profit -894 2828
Total assets 1133248 1213126
Return on assets (ROA) -0.079% 0.233%
Net profit -894 2828
Equity 66016 71365
Return on equity (ROA) -1.35% 3.96%
Loan 183.8 166.4
Consumer deposits 193.4 189
Loan to deposit ratio 95% 88%
D. EVALUATING FINANCIAL MEASURES TO MEET THE
OBJECTIVES
Before the referendum, analyst warned BCS arguing that it may
expose to Brexit turmoil on the expectation that its international operation
will be hit by the referendum. Many analyst stated that Barclays share price
is strongly related with the up and down in sterling value and predicted
sharp fall in the value of sterling will have drastic impact on its stock. As a
result, its investment and corporate banking was subjected with high risk.
Thus, in order to judge the impact of Brexit, stock prices have been
considered (Busch and Memmel, 2017).
Brexit is expected to raise cost and capital requirement for the banks
which have a direct affect on the profitability measures, therefore, two
profitability measures that are Return on Equity and Return on Assets.
Moreover, cost to income ratio has been selected to analyze the cost
proportion on total income. Apart from this, Barclays expected that due to
uncertainty around brexit, business may suffer volume fall which will
decrease its net interest margin (NIM) (Yuksel and Zengin, 2017). It is the
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reason, why the ratio is chosen so as to judge that what actually happened
after referendum.
However, loan to deposit ratio has been chosen because it helps to
assess the liquidity position. High ratio is subjected with sudden adverse
volatility in deposit whereas too low ratio is a signpost of unproductive
capital usage (Zaman, 2017).
E. ANALYSIS OF THE FINANCIAL MEASURES WITH
DIAGRAMS
2017 2016
-2.000%
-1.000%
0.000%
1.000%
2.000%
3.000%
4.000%
5.000%
-0.079%
0.233%
-1.35%
3.96%
Profitability performance of Barclays
ROA ROE
In 2016, BCS ROA was 0.23% fell to loss of -0.079% whereas ROE
dropped from 3.96% to -1.35% shows a significant decline in its
performance. The reason behind this is due to Brexit, it had struggled with
the market volatility. As a result of Brexit, its revenue from all the segments
including personal banking wealth management and Barclay card consumer
came down by 1.78%, 2.28% and 1.81% respectively. Negative ROA and ROE
is a clear signpost that BCS had suffered loss on its total assets and total
equity demonstrates poor performance (Barclays Bank’s annual report,
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2017). In the third requirement, although its pre-tax profit jumped from £837
million to £1.1 bn still, its corporate and investment banking profit sharply
fell down. Despite this, on the day of the referendum, its share price fell 2.51
pc shows poor stock performance.
Cost-to-income ratio rose from 65% to 66% because of lower revenue
and greater operational cost due to investment in digitalization, cyber
resilience and structural reform. Net interest margin (NIM) came down from
3.62% to 3.49% it is because brexit uncertainty caused low interest rate
(Barclays Bank’s annual report, 2017). This ratio helps banks adjusting their
lending practices with the target to maximize profitability. Decline in the NIM
indicates that demand for savings represent greater increase compare to the
demand for loans.
Loan-to-deposit ratio of BCS increased from 88% to 95% in 2017 which
is too high. It demonstrates that BCS had granted excessive loan from the
deposit which means that in future, it may suffer liquidity crunch to cover
unforeseen financial requirements (Goldmann, 2017). It is mainly because
uncertainty declined interest rate and motivates customer to borrow more.
F. CRITICAL ASSESSMENT OF THE IMPACT OF BREXIT ON
BANK’S PERFORMANCE AND RISK
Evidencing from the outcome of the financial analysis, it becomes clear
that Brexit had brought political as well as economic uncertainty in the
market and had an adverse impact over profitability performance and
liquidity crunch of the BCS. Brexit pose significant financial threatening to
BCS including high cost and increasing volatile value of sterling. Especially
for the UK banks engaged in cross border trade lose their passporting rights
in EU. It also brought regulatory uncertainty for UK banks. Moreover, its cost
has been increased in order to comply with ring-fencing rule which requires
structural reforms (Trefis, 2016).
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In order to mitigate the consequences of Brexit, it had decided to
expand in Ireland where BCS is operating since 40 years. Bank decided to
expand it Dublin operations through licensing arrangement as its EU hub so
as to mitigate disruption after brexit. This contingency plan helped BCS to
continue trading activities in the European Union as well.
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REFERENCES
Books and Journals
Busch, R. and Memmel, C., 2017. Banks' net interest margin and the level of
interest rates. Credit and Capital Markets–Kredit und Kapital. 50(3).
pp.363-392.
Goldmann, K., 2017. Financial liquidity and profitability management in
practice of polish business. In Financial Environment and Business
Development. Springer, Cham. pp. 103-112.
Yuksel, S. and Zengin, S., 2017. Influencing Factors of Net Interest Margin in
Turkish Banking Sector. International Journal of Economics and Financial
Issues. 7(1).
Zaman, M., 2017. The role of financial and non-financial evaluation measures
in the process of management control over foreign subsidiaries–
empirical evidence in Slovene multinational companies. Management:
journal of contemporary management issues. 9(2). pp.53-73.
Online
Barclays Bank’s annual report. 2017. [PDF]. Available through: <
https://www.home.barclays/content/dam/barclayspublic/docs/InvestorRe
lations/AnnualReports/AR2017/Barclays%20PLC%20Annual%20Report
%202017.pdf>.
Hunt, A. and Wheeler, B., 2018. Brexit: All you need to know about the UK
leaving the EU. [Online]. Available through: <
http://www.bbc.com/news/uk-politics-32810887>.
Lee, B. T., 2016. Why did Britain vote to leave the EU?. [Online]. Available
through: < https://www.vox.com/2016/6/25/12029962/why-did-britain-
leave-the-eu>.
Trefis, 2016. Barclays Worth $11 Despite Headwind Presented By Brexit Over
Coming Years. [Online]. Available through: <
https://www.forbes.com/sites/greatspeculations/2016/08/11/barclays-
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worth-11-despite-headwinds-presented-by-brexit-over-coming-years/
#1eb8dae143a6>.
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