Tuesday, 11 February 2014

If you want to buy Barclays, the share price is getting close to the action point

Given Barclays pre-released their headline Q4/FY numbers yesterday (link here), the devil was definitely very much in the detail in the full set of results released by the company today.

Given that the recently completed money raising took away, for the moment, any balance sheet concerns, it would be easy to say that the numbers were all about the material writedowns (as noted below for various reasons) that the group has been forced to put through its accounts.  Even prior to all these factors though, adjusted PBT was down as core income fell more than 4%. 

So what's the solution to income malaise?  Well, cost cutting of course.  Spend £1.2bn today and get two-thirds of it back every year in a couple of years time.  Excluding thoughts about the people impacted (and note almost half the 'gains' are from cost cutting at the investment bank) that does not sound too terrible a piece of corporate surgery. 

That, of course, is not the only change going on at Barclays.  They continue to shrink the asset book. Note in particular the £50bn further deleveraging in derivatives.  That's getting on for double alone the 'other assets net growth capacity'. 

The foregone income impact from the above deleveraging is fortunately only just over 1% of income. 
Looking at the FY13 income line, the company is split c. 62% in the retail/commercial and the balance is in the investment bank.  Clearly (just like Credit Suisse last week, see link here) management want to reduce the proportional size of the investment bank, which has to be good for the volatility control of earnings. 

At face value a price:book ratio of just over x0.7, a return to just the 2012 performance of a 9% return on equity suggests upside to the share.  There are many changing parts though.  Again, as with Credit Suisse or UBS, a sum-of-the-parts approach may provide better valuation 'feel'. 

Using underlying divisional profitability and putting (as with Credit Suisse) the non Investment Banking businesses on x10 ebit and the IB itself on x6 gives a core valuation of the FY13 earnings at just over £50bn versus a current £44bn market cap. 

Aside from potential scope to augment these earnings in 2014-15 via organic business or ultimately the cost-cutting programme, I note too that in the Africa/Europe/Wealth section, combined profitability (or lack of it) hides continued solid progress in the former. 

There are multiple influences on the banks and today's static earnings will not absorb tomorrow's unexpected bad debts and the like.  Barclays continues on a journey.  As the 3 year share price chart below shows, it has been volatile and will continue that way. 

If I roll the underlying Barclays numbers forward by a cautious 5% this year and require a 20% discount to my SOTP valuation in order to buy the shares this comes up with a sub 260p share price.  I observe above the importance of the c. 250p support/resistance point too.  If you want to buy Barclays, the share price is getting close to the action point. 

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