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Investment Overview for Barclays (NYSE:BCS)
Below are key drivers of Barclays' value that present opportunities for upside or downside to the current Trefis price estimate for Barclays:
Sales & Trading
- Yield on Fixed-Income Trading Securities: Barclays' yield on fixed-income securities has averaged just under 6% over the period 2009-15, with the figure swinging considerably from one year to the next as market conditions change. While we forecast the yield to remain around 5.5% over our forecast period, if it falls by even a single percentage point by the end of the Trefis forecast period, it would mean a downside of 4% to our price estimate.
- Investment Banking Operating Margin: Barclays' investment banking operations division's operating margin was largely constant around 33% between 2005-12 - with the figure being affected adversely in 2008 due to the global economic downturn. Since then, the figure has been substantially lower due to heavy legal and restructuring costs for each year from 2013 to 2015. While we anticipate long-term margins around 30% due to the "ring-fencing" rule from the ICB, if Barclays cuts costs to improve margins to 35% by the end of the Trefis forecast period then this would represent an upside of 7% to the Trefis price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Barclays at the top of the page.
Barclays is a London-based global money center bank which provides consumers, corporations, governments and institutions with a broad range of financial products and services including consumer banking, credit cards, corporate and investment banking, securities brokerage and wealth management. It is the leader in debt issuance in Europe. It has a strong presence in the U.K. retail and commercial banking industries. Over recent years it has refocused most of its efforts on providing diversified banking services in the U.K., the U.S., Germany and southern Europe.
Personal & Corporate Banking is Barclays' most valuable division
At the end of 2015, Barclays reported more than $330 billion in loans and almost $470 billion in deposits for its personal and corporate banking (PCB) division. With net interest margins just shy of 3%, the PCB division generated almost $10 billion in interest revenues for the banking giant. Taken together with related fee incomes, the division brought in one-third of Barclays' revenues. Although margins for the division were a dismal 3% in 2015 due to several one-time costs, we believe that margins will improve to above 25% in the long run - making the division the single largest source of value for Barclays.
Barclaycard has higher yield figures and better margins compared to the Sales & Trading business
Barclays' card business has reported a net interest yield of just under 9% over the last five years. Taken together with its steadily growing card portfolio and rising purchase volumes, this represents an average of $7.5 billion in revenues over recent years. Also, the profit margin for Barclaycard was around 30% in 2015. On the other hand, the bank's FICC trading yields are roughly around 6% - similar to yields from equity trading over recent years. Although total trading revenues were $8.4 billion in 2015, the figure is expected to be lower over the next couple of years - in sharp contrast to the card business which is likely to witness strong growth. While investment banking margins are expected to stabilize around 30% in the long run, card margins should reach 35% over the same time frame. This makes Barclaycard a more valuable division for Barclays compared to its sales & trading unit.
Brexit may severely impact Barclays' operations over coming years
With the U.K. currently working on plans to exit the European Union, the country's banking industry is likely to witness a sharp reduction in activity through the ensuing phase of uncertainty. The possibility of a recession in the region only makes things worse for British banks like Barclays. In such a scenario, the Bank of England, which has maintained interest rates at near-zero levels since the economic downturn of 2008 may even consider negative interest rates - straining already weak net interest margin figures for the banks over coming years. Investment banking activities at Barclays will also take a hit as Brexit will hurt London's strength as a global financial hub.
British Government's ratification of the ICB's recommendation could force drastic changes in Barclays' business model
With the British government backing the stringent recommendations for U.K.-based banks laid out by the ICB in late 2011, the legislation will be enforced over coming years. Barclays is currently working on several difficult decisions owing to the "ring-fencing" recommendation that seeks to separate retail and investment banking operations.
Increasing demand for investment banking services in emerging markets
With GDP and per capita income of emerging markets growing rapidly, there is an increasing demand for capital from companies in these markets to support the growing purchasing power of the people. Also with the integration of these markets with the global economy, there is a shifting trend in these countries from family-run businesses to corporations. As a result of these factors, an increasing number of companies in these markets are going public, leading to a growing demand for equity underwriting services. Additionally consolidation across different sectors is driving demand for M&A advisory services.
Volcker Rule to affect proprietary trading
The Volcker Rule restricts banks from making certain kinds of speculative investments if they are not on behalf of their customers. Barclays's proprietary trading desks have accounted for a significant percentage of its earnings in the pre-2008 era. The Volcker Rule is likely to result in a reduction in total trading revenues from the U.S. for the bank.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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