Sales & Trading Likely To Enable Barclays Stock To Surpass Q4 Revenue Estimates

Barclays (NYSE: BCS) is scheduled to report its fiscal Q4 2020 results on Thursday, February 18. We expect Barclays to likely beat the consensus estimates for revenues, while its earnings are likely to be lower than the expectations. The company reported third-quarter revenues of $6.77 billion – down by 5% y-o-y. It was driven by lower core banking revenues – Barclays UK and consumer, cards & payments units suffered due to the lower interest rate environment and a drop in consumer demand, partially offset by growth in market-driven revenues (sales & trading). We expect the same to drive the fourth-quarter results. Overall, the bank is expected to report a slight drop in the full year 2020 revenues on a year-on-year basis. (Note: – Barclays reports its results in Pound and the same has been converted into U.S. Dollar for ease of analysis.)

Our forecast indicates that Barclays valuation is around $7 per share, which is 12% lower than the current market price of around $8. Look at our interactive dashboard analysis on Barclays’ pre-earnings: What To Expect in Q4? for more details. 

(1) Revenues expected to be slightly ahead of consensus estimates

Trefis estimates Barclays fiscal Q4 2020 revenues to be around $6.35 billion, around 3% above the $6.19 billion consensus estimate. The bank has seen slight growth in its cumulative nine months revenues in 2020 – up by 3% y-o-y to $21.4 billion. This growth was single-handedly driven by a significant jump in sales & trading revenues due to higher trading volumes, partially offset by lower core banking revenues. We expect the same to reflect in the fourth-quarter results.

Barclays’ loan growth has suffered in 2020 due to the impact of the Covid-19 crisis. Further, the interest rate headwinds have amplified the negative effect of lower loan growth, leading to a drop in core-banking revenues. On top of this, the bank is heavily dependent on its core banking operations, which contributed around 55% of the total revenues in 2019. Hence, it is likely to nullify the positive effect of growth in the sales & trading segment, restricting the full-year 2020 revenues to $27.8 billion – marginally lower than the previous year’s figure.

The growth in Sales & Trading was fueled by higher trading volumes. However, as the economic conditions improve, we expect the trading volumes to normalize. Further, the low-interest rate environment is expected to remain for the next 1-1.5 years. That said, recovery in the economy is likely to boost business and consumer loan growth, benefiting Barclays’ top-line. Overall, the above factors will likely lead the bank’s revenues to $28.1 billion in FY2021. Our dashboard on Barclays Revenues offers more details on the company’s segments.

2) EPS likely to miss the consensus estimates

Barclays Q4 2020 adjusted earnings per share (EPS) is expected to be $0.16 per Trefis analysis, almost 22% below the consensus estimate of $0.20. The Covid-19 crisis has affected the loan repayment capability of customers, increasing the risk of loan defaults. The bank has almost tripled its provision for credit losses to neutralize that risk – up from $1.77 billion on 30th September 2019 to $5.50 billion by Q3 2020. We expect the same trend to drive the fourth-quarter results, leading to an EPS figure of around $0.56 for full-year 2020.

That said, recovery in demand and gradual improvement in the economic conditions will likely improve the situation over the subsequent quarters. It is likely to result in a favorable decrease in the provision for credit losses, boosting Barclays’ profitability in the near term. Altogether, the bank is likely to report an EPS of around $0.82 in FY2021.

(3) Stock price estimate 12% lower than the current market price

Going by our Barclays Valuation, with an EPS estimate of around $0.82 and a P/E multiple of just below 9x in fiscal 2021, this translates into a price of $7, which is 12% below the current market price of around $8.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year

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