Quick Thoughts: Barclays – Moment of Truth

  • The market took in its stride Barclays pre-announcement that 20143Q1 profits would be lower than last year’s GPB1.79bn because of weak FICC revenues; the stock is up over 1% today at GPB2.52 and well above the GBP2.36 of March 11th just after C and JPM issued FICC warnings. We do not expect to see these prices again and for the stock to recover tangible book value, currently GBP 2.83, within the year with upside beyond that.
  • The catalyst for re-rating will be improved credibility around that bank’s target for an 11-12% return-on-equity for 2016, and key to this will be the update to group strategy, particularly of the investment bank, on May 8th (just two days after the first quarter report on May 6th).
  • Barclays is a global leader in debt underwriting and, thanks to Lehman, a full-service US investment bank; indeed, with advisory roles on Comcast and Valeant, it is a top-3 advisory sop along with GS and MS. We expect the bank to re-affirm commitment to these businesses and focus staff cuts on the equities and advisory businesses outside the core US and UK markets; of course, the firm has already indicated it will downsize its commodities and energy businesses and exit some portions, such as power trading, altogether.
  • We believe Barclay’s FICC business, more than 90% of which is now flow rather than structured, is competitively advantaged by scale and technology, and will perform strongly as client activity returns to the short-end (with more normalized monetary policy); we note the easy compares for the second half of the year given clients stepped away from the intermediate and long-ends in 2013H2 as the Fed began taper-talk.

Our note of March 12th, titled “Barclays at the Nadir”, provides further detail.

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