Why 2019 Was Likely The Most Profitable Year For Barclays Since 2011 Despite Stagnant Revenues

BCS: Barclays logo

Barclays (NYSE: BCS) has been extremely successful in reducing costs over the years, with the British banking giant slashing costs across expense heads to create £2.6 billion in savings since 2015. This should have helped the bank’s earnings margin (which is revenues net of all expenses expressed as a percentage of revenues) improve from 0% in 2015 to an estimated 15.5% in 2019 despite revenues remaining largely unchanged over this period. Although Barclays had to set aside another £1.4 billion as provisions for Payment Protection Insurance (PPI) in Q3 2019, we believe that 2019 will be the most profitable year for the bank since 2011 with its net income figure expected to jump nearly 80% from the figure in 2018. Trefis highlights trends in Barclays’ Expenses over the year along with our expectations for 2019 in an interactive dashboard, key elements of which are discussed below.

Notably, Compensation & Benefits (which represents employee salaries) are expected to be £8.4 billion in 2019 – making up 47% of the bank’s £18 billion in estimated Total Expenses for the year. While the bank spends the most on salaries, Operating Expenses (including general and administrative, infrastructure, and litigation and other charges) are expected to contribute ~39% to the bank’s total expected costs in 2019.

  • Barclays’ total expenses have declined 12% since 2015, falling from £21.4 billion to  £18.8 billion in 2018 and are expected to decline further in 2019.
  • Litigation and other expenses have seen the largest decline over this period – falling from £4 billion in 2015 to just £2.2 billion in 2018.
  • Barclays’ total expenses should have declined 4.5% in 2019 due to an 8.1% reduction in Operating Expenses.
  • Moreover, the bank’s total expenses as % revenue have declined from 100% in 2015 to nearly 89% in 2018 and this metric was likely around 85% in 2019.

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Breaking Down Barclays’ Total Expenses

Compensation & Benefits

  • Compensation Expense includes fixed components, such as salaries, benefits and the amortization of share-based and other deferred compensation from prior-year awards, and a discretionary variable component (or bonus).
  • Compensation & Benefits is the largest expense driver, accounting for nearly 46% of the bank’s total expenses in 2018.
  • Compensation & Benefits have steadily declined over the last few years, falling from £8.9 billion in 2015 to £8.6 billion in 2018 primarily driven by a reduction in headcount as well as lower variable compensation.
  • We expect this metric to have decreased 2.7% to £8.4 billion in 2019 – representing 39.5% of our estimate of £21.3 billion for Barclays’ Revenues.

Operating Expenses

  • Barclays’ Operating Expenses include administrative & general, infrastructure commission, and restructuring and other charges.
  • Operating expenses have declined 21% since 2015, falling from £9.7 billion to £7.6 billion in 2018, led by a £500 million decrease in administrative & general expenses and £1.8 billion decrease in litigation and other expenses.
  • Barclays’ litigation and other expenses have plunged 70% falling from £4 billion in 2015 to around £2.2 billion in 2018. This figure was unusually high in 2015 due to the £2.8-billion charge related to provisions for UK customer redress as well as a £1.2-billion provision related to investigations and litigation including Foreign Exchange.
  • We expect litigation charges to be around £1.8 billion in 2019 mainly due to a pre-tax charge of £1.4 billion from additional provisions for Payment Protection Insurance.
  • Moreover, the bank’s administrative expenses are also on a decline, with these expenses shrinking £526 million over 2015-18. The decrease in administrative expenses was primarily due to lower consultancy, legal and professional fees.

Provision & Other Charges

  • Barclays’ provision & other charges have decreased from £1.8 billion in 2015 to £1.5 billion in 2018, driven by a £300 million decrease in provision for credit losses.

Additional details about how Barclay’s Provision & Other Expenses have trended are available in our interactive dashboard.

Income Tax Expense

  • Barclays’ income tax expense has remained stable around £1.1 billion, apart from 2017, when this figure was £2.2 billion due to a one-off charge linked to the implementation of the new U.S. tax regime.
  • We expect the bank’s effective tax rate to be around 20% in 2019.

We expect Barclays’ adjusted EPS for full-year 2019 to be around £0.65 (taking into account the fact each U.S. ADR for the company represents 4 common shares). Using this figure with our estimated forward P/E ratio of 11.6x and a GBP-USD exchange rate of 1.3, this works out to a price estimate of $10 for Barclays’ stock – roughly 5% ahead of the current market price.

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