Legacy Systems And Regulatory Scrutiny Will Limit Future Prospects

Key Takeaways

• Intensifying competition from fintechs and ongoing regulatory scrutiny threaten Barclays' market share, revenue growth, and reputation.
  
• Persistent structural inefficiencies and low interest rates are likely to compress margins and limit sustainable earnings growth.
  
• Sustained income growth, strong shareholder returns, operational improvements, and well-managed risk position Barclays for higher profits and greater stability going forward.

Catalysts

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

• As digital disruption accelerates and fintech/neo-banks gain traction, Barclays faces a structural risk of declining market share and pressure on fee income, which is likely to erode both long-term revenue growth and net margins.
  
• Prolonged low interest rates, driven by demographic trends and tepid inflation in developed markets, threaten to compress net interest income and hinder Barclays' ability to sustainably grow earnings in the coming years.
  
• Ongoing legacy IT and operational complexity, despite recent efficiency gains, may result in persistently high cost-to-income ratios, thereby constraining improvements in net margins and limiting the durability of bottom-line growth.
  
• Barclays continues to lag behind key US peers in terms of investment banking leadership and innovation, making future revenue and market share growth challenging, particularly as international competition intensifies and capital markets activity normalizes.
  
• Increased regulatory and political scrutiny-especially around ESG issues, climate risk, and financial misconduct-not only raises compliance costs but also risks further reputational damage, which could suppress new business opportunities and diminish the quality of future earnings.

Barclays Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Barclays compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Barclays's revenue will grow by 5.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 23.6% today to 23.0% in 3 years time.
• The bearish analysts expect earnings to reach £7.0 billion (and earnings per share of £0.57) by about August 2028, up from £6.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.2x on those 2028 earnings, down from 8.5x today. This future PE is lower than the current PE for the GB Banks industry at 8.7x.
• Analysts expect the number of shares outstanding to decline by 5.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.33%, as per the Simply Wall St company report.

Barclays Future Earnings Per Share Growth

Risks

• Barclays is demonstrating sustained income growth and efficiency improvements, underpinned by a three-year plan delivering structurally higher returns and progressive capital distributions, which may support higher profits and thus a higher share price.
  
• The Investment Bank has shown significant structural progress, with stable or rising market share, top client penetration, and a growing proportion of stable, high-quality revenues, which could drive stronger and more consistent group revenue growth in future years.
  
• Strong capital generation and disciplined capital management have enabled Barclays to raise dividends and buybacks well above prior years, suggesting the company can continue to return significant value to shareholders, positively impacting earnings per share and share price support.
  
• Ongoing investments in technology, operational efficiency, and business diversification, such as the integration of Tesco Bank and expansion in higher-margin mortgage products through Kensington, may lower the group's cost-to-income ratio and support rising net margins over the long term.
  
• Robust credit quality with benign delinquency trends in both the UK and US, stable loan loss rates within guidance, and a strong liquidity and capital position suggest risk is well managed; this stability in asset quality underpins confidence in future earnings growth and shareholder returns.

Valuation

• The assumed bearish price target for Barclays is £2.84, which represents two standard deviations below the consensus price target of £3.86. This valuation is based on what can be assumed as the expectations of Barclays's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £4.35, and the most bearish reporting a price target of just £2.3.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £30.4 billion, earnings will come to £7.0 billion, and it would be trading on a PE ratio of 6.2x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of £3.68, the bearish analyst price target of £2.84 is 29.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.