Overview
Barclays PLC (BARC) is a London, United Kingdom-headquartered transatlantic Consumer, Corporate and Investment Bank which offers products and services across wealth management, credit cards, personal, corporate and investment banking, with a focus on increasing cash returns to shareholders and improving its return on tangible equity on a sustainable basis. The bank is anchored at the two financial centres of the world, London and New York, along with global reach, which provides resilience across the economic cycle by being well diversified both in business and geographic footprint. The group transacts, protects, invests and lends money to customers and clients worldwide, and diversification by business line, geography and customer is provided by clearly defined businesses, Barclays UK and Barclays International, which also enabled the group to fulfil the requirements of the UK regulators in regards to ring-fencing.

The origins of the group can be traced back to two Quakers called John Freame and Thomas Gould, who did business in the City of London in 1690, and had established themselves as goldsmith bankers in Lombard Street, who financed various business in America and other overseas colonies to establish the name of the group. Over the centuries, the group has continuously reinvented and restructured itself to stand the test of time, against a backdrop of international conflicts, industrial and technological revolutions, multiple financial crises to establish itself as one the biggest name in the financial world. In the last 20 years, it has developed a strong investment banking franchise, and it has built a market-leading payments business in the last 50 years through the creation and development of Barclaycard.

Key Statistics


Management

Nigel Higgins has been the Group Chairman since 2 May 2019 and is also the Chairman of Barclays Bank PLC. Jes Staley is the Group Chief Executive and was appointed on 1 December 2015 and has an extensive experience in banking and financial services. Tushar Morzaria is the Group Finance Director.

Segments


(Source: Company Filings)

The operations of the group are differentiated in three operating segments, namely Barclays UK, Barclays International and Head Office. Barclays UKincludes the Barclaycard consumer UK business, UK Business banking and UK Personal banking, and caters to retail customers and small to medium sized enterprises based in the UK to offer everyday products and services. Barclays International consists of Barclaycard Business Solutions, the international Barclaycard business, the Investment Bank, the large UK Corporate business and the international Corporate and Wealth businesses, and offers products and services designed for larger corporate, wholesale and international banking clients.

Top Shareholders

 
(Source: Thomson Reuters)

Financial Highlights (H1 2019, in £m)


 (Source: Company Filings)

Though income from Consumer, Cards and Payments rose by 2%, a challenging income environment resulted in a 1% reduction in Corporate and Investment Bank, which led to a 1% decline in Barclays International income. A drop in the margin and efforts to maintain a reduced risk appetite in UK cards resulted in a decrease of 2% in Barclays UK income. Total income decreased by 1% to £10,790 million from £10,934 million in the prior year, while net operating income was down to £9,862 million from £10,363 million reported in the previous year, as credit impairment charges increased to £928 million (H1 2018: £571 million). The Barclays Group loan loss rate rose to 54bps (H1 2018: 35bps), reflecting a benign economic environment. Even as the company reported cost efficiencies and lower variable compensation accruals in Corporate and Investment Bank, continued investment in the business including planned digitisation of Barclays UK led to 1% increase in operating expenses excluding litigation and conduct to £6,758 million, which corresponded with cost/income ratio of 63% (H1 2018: 61%). Operating expenses, including litigation and conduct, declined to £6,872 million from £8,716 million recorded in the previous year. Profit before tax including litigation and conduct rose to £3,014 million from £1,659 million in H1 2018, while profit before tax excluding litigation and conduct was £3,128 million (H1 2018: £3,701 million). Barclays UK profit before tax excluding litigation and conduct was £1.1 billion (H1 2018: £1.2 billion), while the statutory figure was reported at £1.1 billion (H1 2018: £0.8 billion) and Barclays International profit before tax was £2.3 billion (H1 2018: £2.7 billion). Excluding litigation and conduct, attributable profit was reported at £2.2 billion (H1 2018: £2.6 billion), generating basic earnings per share of 12.6p (H1 2018: 14.9p) and a return on tangible equity of 9.4% (H1 2018: 11.6%), while the non-recurrence of Q1 2018 litigation and conduct charges of £2.0 billion helped the group to report attributable profit of £2.1 billion (H1 2018: £0.6 billion). Excluding litigation and conduct, tangible net asset value (TNAV) per share was reported at 275p (December 2018: 262p), and the group announced that it would pay a half year dividend of 3.0p (H1 2018: 2.5p). Driven by underlying profit generation of £2.4 billion, CET1 capital increased by £1.8 billion to £42.9 billion, which helped the company to report an increase in CET1 ratio to 13.4% (December 2018: 13.2%). Reflecting the prudent liquidity management approach, liquidity pool increased to £238 billion (December 2018: £227 billion). The UK leverage ratio remained stable at 5.1% (December 2018: 5.1%), while an increase in Tier 1 (T1) capital helped to post an increase in average UK leverage ratio to 4.7% (December 2018: 4.5%).

Financial Ratios

 
(Source: Thomson Reuters)

In the financial year 2018, the net interest margin of the company declined, but was above the industry median. However, that was offset by a gain in the efficiency, as efficiency ratio has been rising over the past three years and was above the industry median. However, loan growth has been dismal, and deposits also contracted. The company was also more leveraged than its competitors and pre-tax return on equity has been nearly constant and below the industry.

Valuation Methodology
Method 1:Price/Book Value Multiple Approach (NTM)



To compare BARC with its peers, Price/Book Value multiple has been used. The peers are Metro Bank PLC(NTM Price/Book Value was 0.18), CYBG PLC(NTM Price/Book Value was 0.35), Bank of Ireland Group PLC(NTM Price/Book Value was 0.40),Standard Chartered PLC(NTM Price/Book Value was 0.56),Royal Bank of Scotland Group PLC(NTM Price/Book Value was 0.59) and Lloyds Banking Group PLC(NTM Price/Book Value was 0.84). The median of Price/Book Value (NTM) of the company’s peers was 0.48x (approx.).

Method 2: Price/Earnings Multiple Approach (NTM)



To compare BARC with its peers, Price/Earnings multiple has been used. The peers are CYBG PLC(NTM Price/Earnings was 4.66), Bank of Ireland Group PLC(NTM Price/Earnings was 5.94), Lloyds Banking Group PLC(NTM Price/Earnings was 6.95),Royal Bank of Scotland Group PLC(NTM Price/Earnings was 7.39),HSBC Holdings PLC(NTM Price/Earnings was 10.25) and Metro Bank PLC(NTM Price/Earnings was 14.43). The median of Price/Earnings (NTM) of the company’s peers was 7.17x (approx.).

Share Price Commentary


Daily Chart as at 07-October-19, before the market closed (Source: Thomson Reuters)

On 7 October 2019, at the time of writing (before the market closed, at 11:56 am GMT), BARC shares were trading at GBX 142.86 and remained flat against the previous day closing price. Stock's 52 weeks High and Low are GBX 181.00/GBX 131.04. The company's stock beta was 0.88, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £24.68 billion with a dividend yield of 4.90 per cent.

Growth Prospects and Risks Assessment

By reducing costs, strengthening its capital base and reshaping its balance sheet, the company over the last few years has made great progress in simplifying its operations, which is expected to impact the financials in the future positively. The group continues to target return on tangible equity of more than 9% and 10% for 2019 and 2020 respectively, having achieved 9.4% in the first half of 2019, but it expects to reduce 2019 costs below the original target of £13.6 billion, reflecting the continued investment in the business. It aims to bring down cost/income ratio to below 60% and CET1 ratio is targeted at around 13%. Producing a return on tangible equity of 18% in the current quarter and 16.7% for the half year, Consumer, Cards & Payments continues to progress, and the Corporate & Investment Bank produced a 9.3% return in the quarter. The company has exited the bulk of its non-core and sub-performing assets and has resolved a substantial portion of its major legacy, helping it to focus on the expansion of core areas.

A prolonged adverse change in global economic conditions may result in lower client activity in Barclays Group, which can impede the growth of the group and may lead to financial losses, especially at a time when the group has not fully recovered from the aftermath of the crisis. Operating performance, financial condition and prospects can also be impacted by an increase in political instability in countries where the company is active. As central banks around the world are expected to decrease policy rates, this can impact net interest margin, which in turn would affect the profitability. Some of the factors that could heighten market risks for the group are political concerns in the US and Europe (including Brexit), slowing global growth, the US-China trade conflict and an uncertain outlook for the direction of monetary policy.

Conclusion

Over the last four years, net income before taxes rose by a CAGR of 27.72%, while net income has grown by a CAGR of 130.52%,indicating the exceptional performance reported by the group. Moreover, to adapt itself to the changing environment, the company has started focusing on the digital platform, which is expected to drive further growth and efficiencies in the future.

Based on the decent growth prospects, and supported by valuation undertaken using the above two methods, we have given a “BUY” recommendation at the closing  price of GBX 142.94 (as on 04 October 2019) with single-digit upside potential based on 0.48x NTM Price/Book value (approx.) on FY19E Book value per share (approx.) and 7.17x NTM Price/earnings (approx.) on FY19E earnings per share (approx.).
 
*The Buy recommendation is valid for the current price as covered in the report (as on 07-October-19).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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