A Barclays i-Bank Cut Would Favorably Impact EPS And ROE: Jefferies

By Mani
Updated on

Barclays PLC (NYSE:BCS) (LON:BARC)’s 2014E EPS could increase by 11% and ROE would increase 100 bps if the bank decides to cut back market risk assets associated with its i-bank by 50%, note Jefferies analysts.

Joseph Dickerson and team at Jefferies in their research report dated April 23, 2014 under the title “What if Tushar throws in the towel on the i-bank?” points out that pruning the i-bank could reduce its cost of equity by 700 bps.

I-bank: “The elephant in the room”

The Jefferies analysts write that beyond structure and costs, Barclays PLC (NYSE:BCS) (LON:BARC)’s investment banking unit could be the elephant in the room. Though the bank’s management envisions i-bank to generate £3.3 billion of 2015 net income under its Transform program, the analysts anticipate the i-bank to earn £2.9 billion in 2015 and won’t reach the £3.3 billion level until 2016. The analysts point out that 347 bps uplift to group ROTE would nearly trump the combined effect of disposing of the European assets and delivering on the Transform cost promise. The following table highlights this aspect:

The Jefferies analysts point out Barclays PLC (NYSE:BCS) (LON:BARC)’s investment bank consumes 52% of group capital. Though BarCap has delivered satisfactory results relative to peers, it has disappointed as it could not deliver returns greater than Ke in 2013 and it was a key driver to group earnings downgrades.

11% EPS impact through halving market risk assets

Joseph Dickerson and team at Jefferies note if the CFO Tushar Morzaria decides to cut back market risk assets (largely inventory) associated with the i-bank by 50%, reduces capital consumption and costs and bought back shares with the liberated capital, the Barclays PLC (NYSE:BCS) (LON:BARC)’s EPS, ROTE would be increased.

The following table highlights the effect of the CFO halving market risk assets over its EPS, ROTE:

Enhanced EPS, ROTE through halving market risk

The following table illustrates the reduction in market risk and related share repurchase by Barclays PLC (NYSE:BCS) (LON:BARC):

Market risk reductions and related share repurchase

The Jefferies analysts point out that it is hard to assess how likely the CFO will undertake a significant asset reduction program in the bank’s investment bank and in particular as to whether or not it would advocate returning the freed up capital to shareholders. However, the analysts are certain that Barclays PLC (NYSE:BCS) (LON:BARC) seems to be running thin on ways in which to unlock shareholder value within a reasonable time frame.

By adopting a dividend discount model, the analysts anticipate the bank’s business to migrate to a rather utility-like structure and pegged the price target at 345p.

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