Jefferies analysts anticipate 60p of value for Barclays PLC (NYSE:BCS) (LON:BARC) shareholders from the capital released over the course of the non-core disposal program. Joseph Dickerson and his team at Jefferies, in their research report dated May 15, 2014, said they believe the non-core business justifies further upside and also their Buy rating.
Barclays’ carve-up plan
Last week, Barclays PLC (NYSE:BCS) (LON:BARC) signaled a return to its retail roots by slashing much of its investment bank and parking £400 billion worth of assets in a new “bad bank.” Last month, the British bank announced its intention to create a bank housing the sub-par returning assets from the investment bank and exit retail assets in non-U.K. RBB. Deutsche Bank analysts pointed out that the investment bank is the driver of the y-o-y decline in adjusted profit versus a “resilient performance” in non-IB businesses.
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The Jefferies team notes that Barclays PLC (NYSE:BCS) (LON:BARC)’s newly created non-core unit consists of about £115 billion CRD IV RWA. By allocating capital at 12% and adding the approximately £4 billion of non-core capital deduction items, the analysts estimate that about £17.7 billion of tangible equity is related to the non-core unit, equivalent to 108p per share. The following exhibit highlights the 2013 breakdown of the non-core division by RWA, leverage exposure and revenues, and the analysts’ estimate of PBT. The analysts note that the British bank intends to reduce RWAs associated with this division to about £50bn by 2016.
By considering a 12-month forward price target, the Jefferies analysts computed the value of 85p of final non-core equity discounted back to FY 14, as shown in the graph below:
As can be deduced from the above graph, 42p of equity is “available” in 2016, and hence, the analysts discount back two years, while the remaining 42p is only “available” in 2019, which requires discounting back five years. By discounting back, their estimates of the group’s Ke at 10.5% would yield a FY non-core value of 60p.
Estimates for Barclays’ core
The Jefferies analysts point out that Barclays PLC (NYSE:BCS) (LON:BARC)’s core will be split into four new businesses in H2 viz.: (a) Personal and corporate banking, comprised mostly of the current U.K. Retail and U.K. Corporate and Wealth businesses, (b) Barclaycard, which is largely unchanged from the current Barclaycard, (c) Africa Banking, comprised of the current Africa RBB, along with the African components of Barclaycard and Corporate and Investment Banking, (d)and the investment bank, excluding those assets deemed as non-core.
The analysts believe Barclays PLC (NYSE:BCS) (LON:BARC)’s core will make sustainable returns of about 13.5% on a fully capitalized basis of 12% allocation. Accordingly, the analysts drive the valuation of Barclays Core by using a Gordon’s Growth model (RoTE = 13.5%, Ke = 10.5%, g= 2%) on the FY 14 book value of 188p.
As shown above, this computation would drive the valuation of the core at 257 per share and about 1.3x TNAV.
As shown in the following exhibit, the analysts have pegged Barclays PLC (NYSE:BCS) (LON:BARC)’s group valuation at 325 per share:
The following exhibit captures the Jefferies analysts’ views on different scenarios: