VALUATION HIGHLIGHTS

1. Barclays International (Barclaycard, Advisory & Underwriting, Sales & Trading, Transaction Banking) constitutes 69% of the Trefis price estimate for Barclays's stock.
2. Barclays UK constitutes 29% of the Trefis price estimate for Barclays's stock.

Latest Earnings Q3'20

Barclays delivered a steady performance in Q3 2020, with the bank's investment banking revenues jumping by 29% year-over-year to £1.7 billion - primarily driven by FICC trading revenues, which witnessed an increase of over 23% thanks to a strong performance in macro and credit reflecting increased client activity and spread widening. Overall, the bank's revenue fell by 6% year-over-year to £5.2 billion while the bank's operating income grew by nearly 4.6x as a result of the absence of payment protection insurance provision charges. Moreover, the bank's provisions fell by 63% from the previous quarter resulting in a significant improvement of the operating income. Barclays continues to target a return on tangible equity of greater than 10% and cost: income ratio of less than 60%. However, the bank mentioned that it was becoming difficult to attain the target in the near term, given global macroeconomic uncertainty, the outbreak of coronavirus, and low-interest-rate environment.

Impact of COVID-19

Barclays' stock has a lost considerable chunk of its value since the outbreak of coronavirus. The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. Barclays' retail business, in particular, is likely to the worst-hit as the new loan issuance is likely to subside. This impact is likely to be exacerbated by falling interest rates, which will negatively impact the bank's net interest income. Moreover, the bank's provision for loans will also increase due to the risk of default. Additionally, the bank has suspended all returns to shareholders, including the final dividend payment of 2019, to combat the impact of coronavirus.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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 around 6% over the period 2009-15, with the figure swinging considerably from one year to the next as market conditions change. The yield reached a high of 8.3% in 2016 before going down to 5.8% at the end of 2019, as the revenues declined, but debt trading securities remained upbeat. While we forecast the yield to stay 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 3% to our price estimate.
• Investment Banking Operating Margin: Barclays' investment banking operations division's operating margin averaged around 25% between 2005-12 - with the figure being affected adversely in 2008 due to the global economic downturn. The figure was substantially lower due to substantial legal and restructuring costs for each year from 2013 to 2014. Since then, the figure has improved and was around 29% at the end of 2019. While we anticipate long-term margins around 27% due to the "ring-fencing" rule from the ICB, if Barclays cuts its costs to improve margins to 30% by the end of the Trefis forecast period, then this would represent an upside of 4% 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.

BUSINESS SUMMARY

Barclays is a London-based global money center bank that 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.

SOURCES OF VALUE

Barclays International is Barclays' most valuable division

At the end of 2019, Barclays International reported around $175 billion in loans and over $270 billion in deposits for its Barclays International division. With net interest margins around 4%, the International division generated around $5 billion in interest revenues for the banking giant. Taken together with the related fee and trading incomes, the division brought in approximately two-thirds of Barclays' total revenues. The operating margin for the international division was around 28%, while the margin for the group was only 20% at the end of 2019. We believe that margins will improve to about 30% in the long run - making this division the single largest source of value for Barclays.

Barclaycard has better margins and growth prospects compared to the Sales & Trading business

Barclays' card business reported an average of $5.8 billion in revenues over recent years. Also, the profit margin for the card business was around 27% in 2019. On the other hand, the bank's total trading revenues were $6.8 billion in 2019, although the figure is expected to improve over the next couple of years. While investment banking margins are expected to stabilize around 27% 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.

KEY TRENDS

Brexit (without a trade agreement) is likely to impact Barclays' operations over the coming years

The U.K. formally left the European Union on 31 January 2020, but both sides are negotiating a trade agreement. If the terms of the agreement are not favorable, the country's banking industry is likely to witness a sharp reduction in activity due to a significant decline in economic activity. 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 the coming years. Investment banking activities at Barclays will also take a hit as Brexit (without an agreement) 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 the 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.