Quick Thoughts – Barclays: Smaller but More Profitable, and Worth Comfortably More than TBV
- The 42% revenue decline in FICC to GBP1.23mm in 2014Q1, reported yesterday, is a poor showing on both an absolute and relative-to-peers basis (even allowing for Barclays tilt to rates vs. better-performing credit, the currency headwind from stronger sterling, and winding down product lines such as commodities); the only consolation is that, even with weakness continuing into April, it is hard to see how 2014Q2 will be worse than Q1 on a year-on-year basis, and the second-half compares are then much easier.
- We stand by our view that GBP966mm in 2013Q3 marked the nadir for FICC revenue (given ZIRP and the initial investor reaction to the Fed’s taper talk), and expect the stock to trade to at least TBV (currently GBX284) by year-end with 15-20% upside to TBV in 2015 as investor confidence increases in the “good bank” (with a good bank/bad bank restructuring expected to be announced on Thursday).
- The key is for management to improve balance-sheet and expense efficiency, and this is on track with the CFO indicating that nothing in the PRA or EBA stress tests “unduly concerns us at this stage” and that the firm would better its guidance for core expenses of GBP17.5bn in 2014 by about GBP500mm; we expect new guidance on Thursday for 2015 core expenses given the deterioration in FICC outlook since the original guidance of GBP16.8bn.
- More generally, Thursday’s strategy review will provide a view into the returns and RWA in the “good bank”. For example, the 2014Q1 ROE of 4.7% for the investment bank is inadequate but reflects a “significant” (but as yet unquantified) drag from product lines that Barclays is winding down. We also expect a revision to the long-term, firm-wide RWA guidance of GBP440bn given the current GBP429bn of which GBP56bn is being run-off; this “non-core” will go up, and the investment-bank target of GBP210-230bn down.
- In short, Barclays will be smaller than originally expected but more profitable as well-positioned businesses such as UK Retail Banking, Barclaycard, and the “core” investment bank (including a scale- and technology-advantaged flow business in FICC) become larger in the mix. So long as management can recover close to tangible book value in the wind-down of non-core assets, the stock is worth comfortably more.
Please see our research note making the case that the attractive businesses in the Barclays franchise, combined with a wind-down of non-core assets, make TBV a very conservative measure of valuation.