Strong U.K. Retail Banking Performance Justifies A Significant Upside For Barclays’ Shares

by Trefis Team
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Barclays (NYSE: BCS) released its Q1 2019 results late last week, and the U.K.-based bank saw its pre-tax profit fall from £1.7 billion  in Q1 2018 to £1.5 billion this time around as a direct result of a 5% reduction in revenues to £4.8 billion for the quarter. It was a particularly difficult quarter for the bank’s Investment Banking division, which saw revenues shrink almost 10% year-on-year to £1.9 billion due to an industry-wide reduction in securities trading activity for the period. Per Trefis estimates, Barclays shares have a fair value of $11, which is roughly 25% ahead of the current market price.

We have summarized our full year expectations for Barclays based on the company’s guidance and our own estimates in our interactive dashboard How Did Barclays Fare in Q1 And What Can We Expect For Full-Year 2019?. You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see more Trefis Financial Industry data here.

Key Takeaways From Barclays’ Q1 Results

Barclays U.K. Continues Its Strong Performance Despite Brexit Uncertainty

  • Barclays U.K. reported a marginal improvement in adjusted pre-tax profits year-on-year despite witnessing a slight reduction  in revenues due to lower lending margins thanks to a 1% decline in operating expenses and a 5% reduction in credit impairment charges.
  • Notably, the division benefited from continuing growth in loans as well as deposits. The loan portfolio increased by roughly 2%, driven by growth in its U.K. Personal Banking loan portfolio. This is a significant event given the negative impact of ongoing Brexit talks on U.K.’s economy. In fact, the country’s banking industry reported a decline in demand for mortgages, auto loans and other personal loans from retail customers for the first quarter.
  • Barclays U.K. also did well to improve its return on tangible equity to 16.4% in Q1 (from 15.7% in Q1 2018). Although, the fundamentals of growth in U.K. remain weak, continuing mortgage and deposit growth coupled with the strength of the Barclays’ business model will continue to drive growth for the bank in the near future.

Corporate and Investment Bank (CIB) Division Churns Out A Forgettable Performance

  • CIB division reported a pre-tax profit of £827 million for the first quarter of 2019 in a challenging operating environment, compared to pre-tax profit of £1.2 billion in Q1 2018, with revenues shrinking 11% year-on-year to $2.5 billion.
  • This decline can be primarily attributed to the equities trading desk, which saw a 21% decrease in income in Q1 due to a sharp reduction in client activity and subdued trading volumes.
  • Low consumer confidence, poor investment sentiment, slowing global growth, uncertainty over Brexit and escalating tension between the U.S. and China are expected to continue to weigh on this division’s revenue in Q2, and should hurt results for full-year 2019.

Outlook for Full-Year 2019

  • For the full year, we expect Barclays’ revenues to grow by 5% to £22.2 billion, driven by continuing mortgage and deposit growth and an improvement in the performance of the CIB division over the second half of the year.
  • Net income margin is expected to improve from 6.6% in 2018 to approximately 18% in 2019 on the back of strong revenue growth, lower operating expenses and a lower effective tax rate.
  • We expect Barclays’ EPS for full-year 2019 to be around £0.23. Using this figure with our estimated forward P/E ratio of 9 and a GBP-USD exchange rate of 1.3, this works out to a price estimate of$11 for Barclays’ shares. This represents a figure which is roughly 25% ahead of the current market price.
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