Quick Thoughts: Barclays – Delivering Against Plan and Attractively-Valued

  • Barclays interim results released this morning show strong execution against the good-bank/bad-bank strategy announced on May 8th and good business momentum outside the investment bank. The good bank or “core business” now represents GBP41bn of group equity of GBP55bn, with the investment bank representing 38% of core (see Exhibit below).
  • For 2014H1, the core business delivered an ROE of 11% as improved profitability in operations outside the investment bank offset an ROE decline in the investment bank to 6% from 16% in 2013H1 largely due to a 22% decline in markets income.
  • The drag on group ROE from non-core businesses declined to 4.6% and should reach the “below-3%” target set by management for 2016. RWA were managed down in the first-half by GBP22bn (i.e. 20%) making capital available to be recycled into the core business (where management has committed to a 10% equity-CAGR over the next 3 years at a 12% ROE).
  • TBV/share was GBP2.80 (vs. GBP2.84 in Q1) because of an adverse currency impact of 6p. This means that, even after the 5% rally on today’s numbers (which beat consensus by 10%+), the stock is trading at a near-20% discount to tangible book despite a strong balance sheet (CET1 ratio of 9.9% so that the 2015 target of 10.5% is comfortably achievable) and regulatory approval for a 40-50% dividend payout ratio.
  • The DoJ extension of a non-prosecution agreement (under which Barclays will not face criminal prosecution related to alleged Libor manipulation provided the bank is not convicted of any US crime) from June 2014 to June 2015 highlights on-going legal risk. Conviction in relation to alleged manipulation of the currency markets could re-open the possibility of criminal action around allegations of Libor manipulation; the legal complaint announced in June by the NY AG over the operation of Barclays dark pool is a civil action.

Strong execution against management’s plan to shift the mix of Barclay’s businesses, good momentum outside the investment bank, and confidence in cyclical recovery in the flow businesses of Barclay’s core investment bank support our view that management will meet its end-2016 goals of growing core equity to GBP48-50bn and reducing non-core RWA below GBP50bn (now GBP 87.5bn vs. GBP110bn at year-end). We reiterate the estimate of our note of May 9th for 2016 EPS of 35p (vs. consensus of 32p) which, given today’s results, is now equal to the current run-rate for the core business. Our 10x price-target of GBP3.50 is equivalent to valuing the core bank at GBP50bn (so 1.3x forward tangible equity of GBP40bn vs. GBP33bn today) with an add-on of GBP8bn for non-core tangible capital (vs. GBP14bn today, but less GBP5bn which will be re-cycled to core and allowing for exit/litigation costs).

Exhibit: The Shift to Core at Barclays



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