Capital Reallocation And Brookfield Will Strengthen UK And US Banking

Key Takeaways

• Strategic capital reallocation and partnerships aim to enhance returns and long-term financial performance in core areas.
  
• Cost efficiency and structural hedge income initiatives are geared to boost revenue stability and predictable earnings growth.
  
• Economic uncertainty and weaker client confidence could slow revenue growth and increase risk of credit losses, impacting Barclays' investment banking and U.S. operations.

Catalysts

Provides various financial services in the United Kingdom, Europe, the Americas, Africa, the Middle East, and Asia.

• Barclays expects to achieve higher returns by reallocating capital to its highest-returning UK businesses and improving returns in its Investment Bank and US Consumer Bank segments, which should positively impact earnings.
  
• The company anticipates net interest income to grow further due to strong deposit volumes and favorable mix, which will bolster revenue stability and growth.
  
• Barclays plans to release significant cost efficiency savings, expected to structurally improve its cost base, leading to more consistent returns and likely increasing net margins.
  
• The ongoing simplification of Barclays' business, including strategic partnerships like the one with Brookfield to grow its payment acceptance business, is expected to drive long-term revenue and financial performance improvement.
  
• The bank has locked in substantial structural hedge income over the next two years, which is expected to contribute positively to income stability, enhancing the predictable earnings growth through to 2026.

Barclays Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Barclays's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.9% today to 23.3% in 3 years time.
• Analysts expect earnings to reach £7.1 billion (and earnings per share of £0.56) by about May 2028, up from £5.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £8.3 billion in earnings, and the most bearish expecting £5.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.6x on those 2028 earnings, down from 8.0x today. This future PE is lower than the current PE for the GB Banks industry at 8.0x.
• Analysts expect the number of shares outstanding to decline by 3.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.45%, as per the Simply Wall St company report.

Barclays Future Earnings Per Share Growth

Risks

• Weaker client confidence is delaying investment banking transactions, which could result in slower growth or lower revenues in the investment banking segment.
  
• Transactional and lending income might slow down as companies and individuals become more cautious, impacting overall revenue growth.
  
• The potential increase in U.S. interest rates and economic uncertainty could impact the U.S. Consumer Bank, possibly leading to higher impairment charges and affecting net margins.
  
• There is an increase in the downside probability weighting in IFRS 9 calculations for U.S. portfolios due to elevated economic uncertainty, which could result in unexpected credit losses and pressure on earnings.
  
• The bank's dependency on the structural hedge and deposit strength for income stability poses a risk if market conditions change unfavorably, potentially affecting net interest income and net margins.

Valuation

• The analysts have a consensus price target of £3.437 for Barclays based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £4.1, and the most bearish reporting a price target of just £2.3.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £30.6 billion, earnings will come to £7.1 billion, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of £2.97, the analyst price target of £3.44 is 13.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.