Barclays to Pay 4% in 2014

Financial companies used to be the backbone of any income portfolio - but then the credit crisis hit. Morningstar analysts examine the case for Barclays

Erin Davis 10 September, 2013 | 2:12PM
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While Barclays (BARC) emerged from the financial crisis in the best shape of the three large UK focused banks and was the sole member of the trio to escape a government bailout, it's not without its problems. Most immediate is its capital situation - in July, Barclays revealed that regulators had said it has a £12.8 billion capital hole to fill. The bank quickly announced a £5.8 billion September rights issue, priced at 185p (0.5 times book value). The rest of the hole will be filled via deleveraging, retained earnings, and possibly new convertible debt. While we'd seen Barclays as undercapitalized and think that these moves are necessary to bring the bank in line with post-crisis expectations, we note that the additional capital will make it even harder for Barclays to out earn its 12% cost of equity; we expect the bank's return on equity to be about 10.5% in the medium term.

Still, we see a lot to like about Barclays. Its large market share in its entrenched businesses - retail and business banking, credit cards, and investment banking - helped the firm to generate hefty returns during the boom years. However, Barclays has continued to focus on high-profile but risky businesses such as investment banking through Barclays Capital (about half of pretax profits in 2011 and 2012, but 80% in 2010) and international retail and commercial banking. As a result, it has struggled to bring compensation costs in line with revenue and has suffered embarrassing risk management lapses. We hope the recent Libor rate-rigging scandal will have a silver lining by prodding the bank to pull back from its riskiest activities. Already, the scandal has resulted in new management, with Antony Jenkins and David Walker now in place as CEO and chairman, respectively. We think their past work in retail banking and banking ethics portends a new road ahead for Barclays.

We think the key drivers of Barclays' future profitability, and therefore of its value, are trading income and leverage. Our base case values Barclays at 320p, but we think the firm's value could range from 250p to 380p.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Barclays PLC181.66 GBP0.00Rating

About Author

Erin Davis  is a senior banking analyst for Morningstar.