Coverage Launch: $16 Trefis Price Estimate for Barclays
Barclays (NYSE:BCS) is a London-based global bank that provides consumers, corporations, governments and institutions with a broad range of financial products and services. It has a strong presence in the U.K. retail and commercial banking industries, and has focused on expanding its operations to emerging markets such as India, China and the Middle East. It competes with other worldwide banking institutions and financial services group like Citigroup (NYSE:C), The Royal Bank of Scotland Group (NYSE:RBS), Bank of America (NYSE:BAC), UBS (NYSE:UBS) and JPMorgan Chase (NYSE:JPM).
Understanding Sources of Value for Barclays: $16.07 Trefis Price Estimate
We have broken down our analysis of Barclays into the following business segments:
- Sales & Trading
- Consumer Banking
- BarclaysCard
- Investment Banking
- Asset & Wealth Management
- Stake in BlackRock
Securities Sales and Trading
The sales and trading division of a bank works with both debt and equity instruments. Debt instruments include corporate notes and bonds, certificates, mortgages and leases. Besides common stock of companies regularly traded on exchanges, banks also deal with equity instruments like equity-linked notes. Most diversified banking institutions also create complex products derived from a combination of both debt and equity.
The sales and trading division in many banks works closely with the investment banking business. This allows banks to raise funds for their major customers by selling customized products that address their funding requirements. These financial products can be quite profitable for banks, as they are responsible for both their creation and sale.
Barclays’s Sales & Trading Division
The sales and trading division is the biggest source of value for Barclays, contributing more than 37% of our estimated stock value for the company. In 2009, this division was responsible for almost a third of Barclays’s total revenue, generating nearly $15 billion. Of this, $12.3 billion can be attributed to the sale and trading of debt-based securities and the remaining $2.7 billion was from the trade of equities and equity-based derivative products.
The revenues from this division have grown consistently in the past, with 2008 being the only year in which revenues fell due to the global recession. Data derived from Barclay’s reported revenues for this division suggest that in 2007 the total debt capital deployed was around $317 billion and the total equity capital deployed was more than $70 billion. These numbers fell to $207 billion and $30 billion respectively by the end of 2009.
Our forecast for the securities sales and trading division are largely governed by the amount of debt capital that Barclay’s is expected to deploy in the years to come.
See our full analysis and $16.07 price estimate for Barclays
With the global markets recovering from the effects of the economic downturn, the amount of debt capital deployed is expected to grow steadily in the years ahead. Barclays will likely reach its pre-recessionary levels of debt capital deployment in the next 3 years. We anticipate that this figure will cross $400 billion by the end of our forecast period.