Fixed Income Trading the Biggest Driver to Barclays’ Stock

February 22nd, 2011 by Trefis Team
-6.55%
Downside
9.24
Market
8.63
Trefis
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Barclays

Barclays recently announced its performance for the full year 2010. Based on the better than expected performance of its sales & trading division, we have updated our price estimate for the company to $18.30. This is still about 10% lower than the current market price of just over $21. 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).

Barclay’s 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 is also increasing its push in the U.S. especially following its purchase of Lehman Brothers’ U.S. assets.

Sales and Trading Revenues Buoy Results

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The sales and trading division revenues of $16.7  billion for 2010 represents almost one third of Barclays’ total revenue of $49 billion for the year. Debt trading contributed around $13.6 billion and the remaining $3.1 billion came from equity trading. Barclays had assets worth $215 billion in debt instruments and $40 billion in equity instruments deployed as a part of the sales and trading division.

We forecast earnings in the sales and trading division by looking at the assets deployed in the equity and debt markets and the yield the bank earns on this capital. Debt assets deployed by Barclays dropped significantly from its peak value of $315 billion in 2007 to almost $200 billion in 2009, but we expect assets to recover to near $290 billion in 2013. This represents an annual growth of 10% for debt assets deployed and is fueled by the growing need for companies globally to raise capital to expand their operations after the economic downturn and a return of liquidity as market recover from the recent downturn. This growth combined with an expected yield of about 6% gives Barclays most if its value. In fact, we estimate that sales and trading constitutes nearly 44% of Barclays’ share price.

See our full analysis and $18.30 price estimate for Barclays