Overissuance Pushes Barclays To Lift 2022 Cost Guidance; We Think Higher Rates More Than Compensate

No-moat Barclays reported second-quarter profits before tax of GBP 1,499 million versus a consensus estimate of GBP 1,631 million, which was collected by the bank itself prior to the release. Income generation was decent, but higher litigation and conduct costs have forced Barclays to raise its total cost outlook for 2022 materially to GBP 16.7 billion from GBP 15 billion previously. The strengthening U.S. dollar versus the British pound also contributed to this revised guidance. We raise our fair value estimate to GBX 208, from GBX 185 per share previously, despite the short-term cost spike flagged by management. Expenses are expected to grow on an underlying basis, due to inflation filtering through to wage growth as well as investment spending; however, the one-off nature of the elevated litigation and conduct charges in 2022 are less meaningful as a driver of our fair value estimate. Moreover, we lifted our net interest margin assumptions after incorporating the rapid interest-rate hike cycle being followed by U.S. and U.K. central banks, which results in better operating efficiency over the medium term, with income outpacing expenses.