By Lawrence White and Iain Withers
LONDON (Reuters) -Barclays warned of growing pressure on its UK business as stubborn inflation and high interest rates pushed customers to repay debt and switch into savings, squeezing the bank's margins and hurting its shares despite a fresh share buyback.
Shares were 6.4% lower at 0745 GMT after the British bank reported first-half pretax profit of 4.6 billion pounds ($6 billion), in line with forecasts, but signalled profit margins were shrinking.
The bank said its net interest margin (NIM) – a key measure of profitability – in the UK would now likely dip by the end of the year below its half-year level of 3.2%, compared with previous guidance above that level, and would likely come in at 3.15%.
"Since we put out that full year guidance the facts have changed," Finance Director Anna Cross told reporters.
"Base rates were expected to peak at 4.25% in the UK and we are now sitting here at 5%, inflation is persistently higher and mortgage rates are higher," she said.
The results showed how sticky inflation in Britain - the highest among the G7 group of rich nations - and political pressure to help struggling savers are taking the shine off plumper revenues from higher interest rates.
A strong performance in its U.S. cards business was offset by sliding investment bank revenues still suffering from a slump in global dealmaking.
"The 750 million pound buyback is the silver-lining in what was a modestly disappointing quarter for revenue with only the UK in-line," Jefferies said in a note, suggesting Barclays (LON:BARC)' lowered guidance on margins in Britain raised questions about its future performance.
JPMorgan (NYSE:JPM) analysts said they expected small downgrades for Barclays' future performance, partly due to squeezed margins in Britain as competition intensifies and households contend with cost-of-living pressures.
Rising interest rates are also squeezing borrowers and increasing the risk of loan defaults.
The bank set aside 896 million pounds in the six-month period for potentially soured loans, more than double the 341 million pound charge the previous year.
INVESTMENT BANK STRUGGLES
Barclays reported a 10% drop in income at its investment bank - missing analyst forecasts - with income from its fixed income, currency and commodities division down 6% to 2.97 billion pounds and income from its equities unit tumbling 49% to 1.3 billon pounds.
U.S. banking giants such as Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C) earlier this month reported lacklustre results for investment banking, although rival JPMorgan's finance chief Jeremy Barnum said he saw budding growth in areas like stock offerings.
European rivals are also struggling, with Deutsche Bank (ETR:DBKGn) reporting on Wednesday investment bank revenues would fall this year instead of staying flat.
Several investors told Reuters this month they wanted Barclays to prioritise returning more capital to shareholders instead of investing it, after the lender completed a 500 million pound buyback in April.
($1 = 0.7724 pounds)