According to a new report from Jefferies Equity Research Europe, Barclays PLC (ADR) (NYSE:BCS) (LON:BARC) “transform” program is finally hitting on all cylinders. The report highlights that the bank is delivering on significant cost savings and that “macro tailwinds are driving better impairments.”
Jefferies analysts Joseph Dickerson, Omar Fall and William Davison summarize their point of view in the overview: “…we now regard ’16 cost guidance as achievable. Better impairments and costs lead to a 7% EPS upgrade for 2016.”
The analysts currently rate Barclays a Buy, and have raised their price target on the equity from 325 p to 331 p.
Jefferies upping earnings estimates for Barclays
For the first time since September 2013, Jefferies is increasing future earnings estimates for Barclays PLC (ADR) (NYSE:BCS). Dickerson et al are decreasing their impairment estimates by 7% from 2014-2016 and are also slightly adjusting operating expenses lower. The good news is that Barclays management is delivering absolute cost savings in businesses outside of the investment bank in their core business.
The analysts also say they now believe that management’s aggressive 2016 cost guidance can be achieved. They say overall improved impairments and costs calls for a 7% EPS upgrade for 2016.
Executing on “Transform” program
Dickerson and colleagues highlight that Barclays PLC (ADR) (NYSE:BCS)’s “Transform” program is coming to fruition, and that management is delivering on improved efficiency both in the investment bank and non-investment bank areas. The cost/income ratio in the UK retail bank division put up the best YoY improvement in the sector, falling a solid 5 points YoY. The cost base is decreasing in all units across the board except Barclaycard.
Of note, non-core is “rapidly de-risking and has recycled £2.8bn of capital into the core.” Although non-core de-risking is having a significant impact on revenues (revenue in that division dropped 55% YoY, compared to RWA balances decreasing around 20%). The report notes that recycling £2.8bn back into the core brings the implied CET1 of the core business to 9.4% in the first half of 2014 vs 8.9% at the end of 2013.
Calculation of valuation and risks
Jefferies sum of the parts valuation for Barclays PLC (ADR) (NYSE:BCS) is 331 p. Given that Barclays currently trades on 0.77x book, a notable discount to the current 1.1x for the broader European banks sector, Dickerson et al. note the risk/reward is clearly asymmetric with 46% upside to our base case target and 9% downside to our bear case.
They argue that there are macro, regulatory and idiosyncratic risks to their Barclays investment thesis, with the risks mainly related to delivery of non-core run-off and cost efficiency in core.