Barclays PLC (NYSE:BCS) (LON:BARC) has no more control over the capital management due to the introduction of PRA leverage ratio. However, according to analysts Joseph Dickerson, Omar Fall, William Davison and Jean Farah from Jefferies, the asset reduction plan of Barclays, which was £65-80 billion, could be increased to £185-£200 billion with manageable P&L impact. If taken, the step will deliver a leverage ratio of 3.4 percent against 3 percent targeted, more acceptable i-bank return and increased dividend payout ratio of 50-70 percent compared to 40-50 percent targeted.
Owing to such possibility, Jefferies have initiated a Buy rating for the investment bank with a price target of 367p.
Barclays must target a higher leverage ratio
According to analysts, Barclays PLC (NYSE:BCS) (LON:BARC) should reach for a leverage ratio of approximately 3.5 percent, as a 3.0 percent target is vulnerable to any further regulatory and earnings risks. Barclays should deliver a ratio of about 3.5 percent to come out of situation, safe.
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Analysts have re-allocated capital to Barclay’s business segment based on a 3 percent leverage constraint, and hold the view that the Investment Bank takes up 62 percent of group capital compared to 52 percent earlier.
Analysts believe that if the investment bank manages to create autonomy in asset management using higher leverage ratio, this will enhance the payout ratio to 50-70 percent compared to the present target of 40-50 percent.
Barclays can reduce assets in two ways
Additionally, there are two potential areas where asset reduction can be done, the first being £38 billion reduction in potential future exposures (PFEs) for derivative contracts, and the other one being asset reduction related to undrawn credit commitments.
Asset reduction in the first area can be achieved easily without incurring much cost, and the second one can be performed, but with little more cost involved, and will have an annual impact of £330 million on revenue. The combined result of these measures will increase 2015 ROE by around 180bps to 10.6 percent.
Earlier, S&P slashed rating for key European banks
A couple of months back, Standard & Poor’s slashed the credit rating of the three prime European banks: Credit Suisse Group AG (NYSE:CS), Barclays PLC (NYSE:BCS) (LON:BARC) and Deutsche Bank AG (NYSE:DB) (ETR:DBK). For Swiss bank UBS AG (NYSE:UBS), the rating agency affirmed A/A-1 long- and short-term ratings.
Credit ratings of all the three banks were downgraded from A+ to A due to stricter regulations and uncertain market conditions. In its statement, S&P 500 said that the rating of these banks was slashed due to “increasing risks that Europe’s large banking groups active in investment banking face as regulators and uncertain market conditions continue to make operating in the industry more difficult.”