Is Barclays Stock Undervalued?

Barclays’ stock (NYSE: BCS) has lost 24% YTD, as compared to the 18% decline in the S&P500 over the same period. Further, it is currently trading at $8 per share, which is 23% below its fair value of $10 – Trefis’ estimate for Barclays’ valuation. The bank outperformed the consensus estimates in the first quarter. Its net revenues increased 7% y-o-y to $8.7 billion, mainly driven by a similar rise in the corporate & investment bank revenues. The segment benefited from higher sales & trading revenues, partially offset by a drop in investment banking income due to lower underwriting deal volume. In addition, the company also posted a 2% improvement in Barclays UK revenues, thanks to the growth in the personal banking business. That said, despite the increase in the top line, the adjusted net income decreased 20% y-o-y to $1.9 billion. It was because of an unfavorable increase in the provisions for credit losses and higher noninterest expenses as a % of revenues (Note – Barclays originally reports in GBP (Pound), the same has been converted to USD for ease of comparison).

The bank’s top-line increased 8% y-o-y to $30.2 billion in 2021, with all the segments posting growth. Barclays UK rose by 10% benefiting from an 18% rise in the personal banking division and a 15% increase in the business banking sub-segments. Similarly, the corporate & investment bank revenues improved 6% y-o-y on the back of an increase in equity trading and investment banking income, partially offset by lower FICC (fixed income, currency & commodity) trading revenues. Along with the growth in the top line, the firm’s provisions for credit losses decreased from $6.2 billion to -$898 billion. It favorably impacted the adjusted net income – up by 3.5x to $8.8 billion.

The low-interest environment has hurt the net interest income of major lenders across the globe over 2020 and 2021. However, we anticipate the interest rates to improve in 2022. Notably, the Federal Reserve has already increased the interest rates twice this year, and more hikes are likely to follow. This will likely benefit the NII. On the flip side, the sales & trading and investment banking revenues are expected to normalize. Overall, Barclays’ revenues are forecast to remain around $29.1 billion in FY2022. Additionally, BCS’s adjusted net income margin is likely to stabilize around 20%, leading to an adjusted net income of $5.7 billion and an annual EPS of $1.35. This coupled with a P/E multiple of just below 8x will lead to the valuation of $10.

Here you’ll find our previous coverage of Barclays stock, where you can track our view over time.

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[1] Month-to-date and year-to-date as of 5/20/2022
[2] Cumulative total returns since the end of 2016

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