Integration Of Tesco Bank Will Expand UK Customer Base

Key Takeaways

• Barclays aims to boost returns and shareholder value with disciplined execution of a 3-year plan, and a focus on U.K. market growth via strategic acquisitions and RWAs reallocation.
  
• Cost-efficiency initiatives and organic growth in the U.S. Consumer Bank support earnings growth, focusing on optimizing operations and retaining card receivables.
  
• Barclays' exposure to economic shifts, regulatory impact, and integration risks could challenge profitability, capital adequacy, and strategic ambitions in uncertain market conditions.

Catalysts

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

• Barclays is executing a disciplined 3-year plan targeting improved returns and higher shareholder distributions, aiming to achieve a return on tangible equity (RoTE) of over 12% by 2026. This operational discipline, if successful, will positively impact earnings growth and shareholder value.
  
• The strategic acquisition and integration of Tesco Bank aims to strengthen Barclays' U.K. market presence, leveraging Tesco's large customer base for cross-selling and growth opportunities. This can result in increased revenues and improved net interest margins.
  
• Barclays plans to reallocate £30 billion of additional RWAs to high-return U.K. businesses while keeping investment banking RWAs stable. This rebalance towards higher-return segments is expected to improve overall profitability and revenue efficiency.
  
• The cost-efficiency initiative has delivered £1 billion in savings in 2024, with another £1 billion targeted over the next two years through streamlining operations and technology optimizations. This focus on cost management will contribute to enhancing net margins.
  
• Barclays continues to expect organic growth in its U.S. Consumer Bank by retaining a significant portion of its card receivables through 2029 and securing new partnerships, supporting revenue growth and mitigating risks from the loss of the American Airlines card partnership. This strategic focus will help sustain earnings and RoTE in the medium to long term.

Barclays Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Barclays's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.9% today to 23.8% in 3 years time.
• Analysts expect earnings to reach £7.3 billion (and earnings per share of £0.56) by about March 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 £6.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.5x on those 2028 earnings, down from 8.2x today. This future PE is lower than the current PE for the GB Banks industry at 8.2x.
• 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 7.88%, as per the Simply Wall St company report.

Barclays Future Earnings Per Share Growth

Risks

• The reliance on stable interest rates and favorable economic conditions, particularly in the U.K. and U.S. markets, implies vulnerability to economic downturns or adverse rate changes, which could impact net interest income and earnings.
  
• The forecasted RWA (Risk-Weighted Assets) inflation driven by regulatory changes, estimated between £19 billion and £26 billion, could pose a risk to capital adequacy and may constrain capital distributions, affecting returns and earnings.
  
• Execution risks associated with integrating the Tesco Bank acquisition and realizing cost synergies might delay expected benefits, impacting net margins and cost efficiency until after the initial timeline, thereby affecting overall profitability.
  
• The potential impact of regulatory headwinds, such as changes in Basel regulations or stress test frameworks, could constrain RWAs in the U.S. Consumer Bank, affecting capital allocation and profitability.
  
• Market share improvements in the Investment Bank are contingent on favorable industry dynamics and market conditions, and any downturn in the market or failure to capture increased business could limit revenue growth and returns on equity.

Valuation

• The analysts have a consensus price target of £3.442 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 £3.95, 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 £30.7 billion, earnings will come to £7.3 billion, and it would be trading on a PE ratio of 7.5x, assuming you use a discount rate of 7.9%.
• Given the current share price of £3.05, the analyst price target of £3.44 is 11.4% 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.