Barclays Stock Offers Sizeable Gains As Economic Conditions Improve

by Trefis Team
+18.61%
Upside
9.98
Market
11.84
Trefis
BCS
Barclays
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Barclays stock (NYSE: BCS) has a 60% upside (back to pre-crisis level) in 1-2 years as the lower interest rate environment improves and GDP sees some recovery, leading to a growth in total loans and net interest income. Lower provision and stable NPL (Non-Performing Loans) can improve Barclays’ profitability in the near term – providing a boost to the bank’s stock price.

Barclays stock currently trades near $5.83 and it has lost around 40% in value so far this year. It traded at a pre-Covid high of $9.32 in February, and it is 40% below that level now. Also, the stock has gained around 50% since its March lows of $3.84. Having said that, we believe that the stock has an upside of nearly 60% from its current level driven by expectations of improving demand and gradual improvement in economic conditions following the lifting of lockdowns. Our conclusion is based on our detailed analysis of Barclays’ stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 55% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how Barclays and the broader market performed during the 2007/2008 crisis

2007-08 Financial Crisis

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of the S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Barclays vs S&P 500 Performance Over 2007-08 Financial Crisis

Barclays stock declined from levels of around $36 in September 2007 (pre-crisis peak) to levels of around $4 in March 2009 (as the markets bottomed out), implying Barclays stock lost 89% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $14 in early 2010, rising by 245% between March 2009 and January 2010. In comparison, the S&P 500 declined by 51% before recovering by 48% between March 2009 and January 2010.

Barclays Fundamentals

Barclays’ revenues have decreased from around $34 billion in 2015 to $28 billion in 2019, primarily due to the low-interest environment and sub-par performance of its UK retail segment. Nevertheless, Barclays’ earnings per share grew from -$0.14 per share in 2015 to $0.74 in 2019. However, the bank’s Q3 2020 net revenues were 6% below the level seen a year ago, while the EPS figure for the quarter fell from $0.30 in Q3 2019 to $0.20 in Q3 2020.

Conclusion

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment.
Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to around $9.32 once economic conditions begin to show signs of improving. This marks a full recovery to the level Barclays stock was at before the coronavirus outbreak gained global momentum.

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