[Updated 05/18/2021] Barclays Valuation Update
Barclays stock (NYSE: BCS) has gained more than 150% since the March 23 lows of last year and at its current price of $10 per share, it is 20% below its fair value of $12 – Trefis’ estimate for Barclays’ valuation. Further, its stock has rallied almost 29% YTD, which is in line with the rise in other bank stocks.
Barclays recently released its first-quarter FY2021 results, with the bank surpassing the consensus estimates. It reported total revenues of $8.1 billion, which was 3% more than the year-ago period. Notably, the rise was mainly due to the favorable foreign exchange movement (GBP/USD), while the original revenue figures decreased by 6% y-o-y (Note – Barclays originally reports in GBP (Pound), the same has been converted to USD for ease of comparison). It posted corporate & investment bank revenues of $4.6 billion (up 9% y-o-y), primarily driven by more than 80% growth in equity trading, partially offset by a 29% drop in FICC (fixed income, currency & commodity) trading revenues. Further, investment banking revenues grew 48% y-o-y, driven by a significant jump in equity underwriting deals. That said, Barclays UK and consumer, cards & payments segments struggled in the first quarter. While Barclays UK suffered due to lower net interest income (NII) driven by interest rate headwinds, the drop in consumer, cards & payments unit was due to lower outstanding card loans and reduced payments activity. The bank’s adjusted net income of $2.35 billion almost tripled on a year-on-year basis, mainly due to a significant drop in provisions for credit losses – BCS has reduced its provisions figure over the recent quarters.
The company reported $27.9 billion in revenues for the full-year 2020 – marginally below the 2019 figure. While its Barclays UK and consumer, cards & payments units reported negative growth due to interest rate headwinds and lower consumer spending levels, the decline was almost offset by higher revenues in the corporate & investment bank division. The growth in corporate & investment bank was driven by a rise in sales & trading and investment banking revenues due to higher trading volumes and an increase in underwriting deals respectively. Further, the bank witnessed a significant buildup in provisions for credit losses from $2.5 billion to $6.2 billion in the year. That said, we expect consumer spending to see some improvement in FY2021, although the low-interest rates are unlikely to see a swift revival. Further, the higher trading volumes and underwriting deal volumes are likely to continue for some more months before normalizing with recovery in the economy. Overall, the above factors will likely enable Barclays’ revenues to touch $29.9 billion in FY2021. Additionally, the provision for credit losses is likely to see a favorable decrease with improvement in the economic conditions, benefiting the profitability figures in the year. This will likely result in an EPS of $1.22, which coupled with a P/E multiple of close to 10x, will lead to the valuation of $12.
[Updated 04/08/2021] Barclays Stock Is Trading Near Its Fair Value
Barclays stock (NYSE: BCS) has rallied 170% since the March 23 lows of the last year and at its current price of $10 per share, it is around 4% below its fair value of $11 – Trefis’ estimate for Barclays’ valuation. Barclays is a London-based global money center bank and is the leader in debt issuance in Europe. It reported better than expected earnings in its fourth-quarter results, after a strong performance in the third quarter. The bank’s revenue fell by 4% year-over-year to $6.8 billion in the fourth quarter, and its operating income decreased by nearly 5% y-o-y to $6.15 billion. This was primarily due to a 19% y-o-y drop in its net interest income to $2.4 billion, partially offset by growth in investment banking and sales & trading businesses – its cumulative investment banking and sales & trading revenues increased by 26% year-over-year to $2.8 billion, primarily driven by FICC (fixed income, commodity and currency) trading revenues. Moreover, BCS provisions for loan losses fell by 18% from the previous quarter, benefiting the operating income. (Note – Barclays originally reports in GBP (Pound), the same has been converted to USD for ease of comparison).
Barclays reported revenues of $27.9 billion for the full year 2020 – marginally lower than the 2019 figure. The bank holds a sizable portfolio of outstanding loans – $263.3 billion in Barclays UK and $38.9 billion in consumer cards & payment segment (as per 2020 figures). This makes it quite sensitive to movement in interest rates. It generated close to 45% of its total revenues from net interest income over 2017-2019, which declined to 37% in 2020 – net interest income dropped by 15% y-o-y to $10.4 billion. It was mainly driven by a lower interest rate environment, a decline in new loan issuance, and lower consumer spending levels. However, the negative impact of lower core banking revenues was almost offset by the positive growth in the corporate & investment bank segment (up 20% y-o-y) driven by higher sales & trading and investment banking revenues. That said, as the economy recovers, the consumer spending levels are likely to recover. However, the low-interest rates are likely to remain below the pre-Covid-19 levels for some more time. Further, the sales & trading and investment banking revenues are likely to normalize over the subsequent quarters. Overall, Barclays’ revenues are likely to remain around $28.6 billion in FY 2021 – slightly more than the 2020 figure.
The bank’s net income figure declined by 39% y-o-y to $1.96 billion in 2020, primarily due to significant build-up in provisions for loan losses – the provisions increased from $2.5 billion to $6.2 billion in the year. The impact of higher provisions was partially offset by a drop in total operating expenses as a % of revenues from 71% to 64% due to lower litigation and conduct charges. Altogether, this led to an EPS of $0.45 – down 39% y-o-y. Barclays increased its provisions in 2020 to neutralize the higher risk of loan defaults due to the Covid-19 crisis and economic slowdown. However, as the economic conditions improve and more and more people receive the Covid-19 vaccination, its provisions are likely to see a favorable decrease. We expect the bank’s EPS figure to increase to $1.03 in FY2021. Additionally, the bank has announced its intention to restart its share repurchase program this year. Overall, the EPS of $1.03 coupled with the P/E multiple of just below 11x will lead to a valuation of around $11.
[Updated 08/17/2020] Why Barclays Stock Offers Sizeable Gains
Barclays stock (NYSE: BCS) lost more than 60% – dropping from $10 at the end of 2019 to around $4 in late March – then spiked 40% to around $5.60 now. This implies it’s still 44% lower than the start of the year.
There were two clear reasons for this: The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the near-term consumer demand plunged. This could negatively affect businesses and individuals, impacting their loan repayment capability and exposing Barclays to sizable loan losses. The multi-billion-dollar Fed stimulus provided a floor, and the stock recovery owes much to that.
But we believe there is more upside to come over the coming months
Trefis estimates Barclays’ valuation to be around $7 per share – about 25% above the current market price – based on an upcoming trigger explained below and one risk factor.
The trigger is an improved trajectory for Barclays’ revenues over the second half of the year. We expect the company to report $27.8 billion in revenues for 2020 – similar to the figure for 2019. Our forecast stems from our belief that the economy will gradually improve in Q3. Further, the easing of lockdown restrictions in most of the world is likely to help consumer demand, benefiting the overall business scenario. The bank’s investment banking operations have driven positive revenue growth in Q1 and Q2 due to higher trading volumes, with the bank’s trading revenues surging by 63% in the first half of 2020 as compared to the year-ago period. On similar lines, Barclays’ underwriting fees saw significant growth in the first half of 2020 due to a jump in debt underwriting deals after the Fed stimulus. This has partially offset the impact of weak revenues in other segments. While we expect the trading income to drop in the subsequent quarters, it is likely to be still higher than the year-ago period. Overall, we see the company reporting an EPS in the range of $0.47 for FY2020.
Thereafter, Barclays’ revenues are expected to improve to $28 billion in FY2021, due to an increase in retail revenues, partially offset by a decline in sales & trading revenues. Further, the net income margin is likely to grow as compared to the previous year due to a decline in provisions for credit losses, leading to an EPS of $0.82 for FY2021.
Finally, how much should the market pay per dollar of Barclays’ earnings? Well, to earn close to $0.82 per year from a bank, you’d have to deposit about $82 in a savings account today, so about 100x the desired earnings. At Barclays’ current share price of roughly $5.50, we are talking about a P/E multiple of just below 7x. And we think a figure closer to 8.5x will be appropriate.
That said, banking is a risky business right now. Growth looks less promising, and near-term prospects are less than rosy. What’s behind that?
Barclays has a huge portfolio of consumer, commercial, and wealth management loans – more than $380 billion in FY 2019. The economic downturn could deteriorate the loan repayment capability of its consumers, exposing the bank to significant loan defaults. In anticipation of this risk, Barclays has increased its provisions for loan losses from around $1.2 billion in the first half of 2019 to $4.9 billion so far – a 4x jump. If the economic condition worsens, this figure could further increase in the subsequent months. Further, a negative economic outlook will make it expensive for the bank to attract funding, increasing the cost of its operations. To sum things up, we believe that Barclays’ stock is currently undervalued and offers upside, given its strong retail and investment banking operations.
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