Acquisition Of Tesco Bank Will Create New Channels For Lending And Deposits

Key Takeaways

• Strategic acquisition of Tesco Bank may boost revenue through new distribution channels and enhanced U.K. growth prospects.
  
• Cost control measures and share buybacks aim to improve margins, EPS, and shareholder value while offsetting inflationary pressures.
  
• Weaker currency, changing bank rates, and regulatory requirements pose challenges to Barclays' revenue, profitability, and capital allocation.

Catalysts

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

• The strategic acquisition of Tesco Bank is expected to enhance Barclays' growth prospects in the U.K. market by creating new distribution channels for unsecured lending and deposit businesses, potentially boosting revenue streams.
  
• Continued cost control and efficiency savings, evidenced by £1 billion savings anticipated for 2024, are expected to improve net margins by offsetting inflationary pressures and creating capacity for further investments.
  
• The completion of share buybacks, amounting to £750 million, is expected to reduce the share count and improve Earnings Per Share (EPS), contributing to shareholder value.
  
• The structural hedge program, designed to stabilize net interest income (NII) in volatile rate environments, is anticipated to provide a significant and predictable NII tailwind, with opportunities to further increase structural hedge income by 2026, positively impacting revenue.
  
• Increasing loan growth in key areas such as mortgages and card acquisitions in the U.K., supported by proactive lending strategies, is expected to drive revenue growth and improve financial performance metrics such as return on tangible equity (RoTE).

Barclays Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Barclays's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.0% today to 22.2% in 3 years time.
• Analysts expect earnings to reach £6.5 billion (and earnings per share of £0.49) by about December 2027, up from £4.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £5.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.4x on those 2027 earnings, down from 9.0x today. This future PE is lower than the current PE for the GB Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 3.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.81%, as per the Simply Wall St company report.

Barclays Future Earnings Per Share Growth

Risks

• The weaker U.S. dollar has been a headwind to income and profit, which may impact Barclays' revenue growth and profitability.
  
• Any changes in the assumed U.K. bank rate, with a reduction from the 5% assumed in February to 4.5%, could impact net interest income growth forecasts, affecting revenue.
  
• Delinquencies and credit trends in the U.S. Consumer Bank could lead to volatility in impairment charges, impacting net margins and earnings.
  
• The sale of non-performing assets and disposals of certain portfolios might result in a temporary drag on the CET1 ratio, impacting capital allocation for growth.
  
• There is an anticipated increase in Pillar 2A capital requirements, which may affect regulatory capital ratios and constrain earnings distribution.

Valuation

• The analysts have a consensus price target of £2.98 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 £3.85, 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 2027, revenues will be £29.1 billion, earnings will come to £6.5 billion, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 11.8%.
• Given the current share price of £2.67, the analyst's price target of £2.98 is 10.7% 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.