Barclays PLC must use its first investor day in a decade to build confidence in its investment banking business, which dragged on the lender's profitability and valuation.
On Feb. 20, the UK group is expected to brief shareholders on a plan that would cut costs and expand the proportion of non-investment bank operations in its business mix. Barclays executives previously said the investment bank is at the right size and scale to compete effectively with US peers and generate good returns.
Investors remain skeptical as the investment bank is Barclays' most capital-intensive, least profitable and least cost-efficient division. More clarity about how the investment bank makes money, as well as its future growth and contribution to capital returns, are needed to reassure investors and shift the share price, according to analysts.
"While many investors recognize the strengths of Barclays' consumer businesses, the [investment bank] remains a source of significant uncertainty," Berenberg equity analysts said in a Jan. 25 research note. The group must demonstrate the value generated by the key businesses within the investment bank, providing more details on returns, costs and capital at each of these units, they said.
Performance pressure
Measured by market value and returns, Barclays lagged most of its domestic and global competitors in recent years, S&P Global Market Intelligence data shows. At 0.58x, the group's average price-to-tangible book ratio was the second lowest among UK, EU and US peer banks over the last three years.
It performed marginally better in terms of return on average equity, but still delivered a lower result than most of the peer group, Market Intelligence data shows.
Most of the weakness in Barclays' performance versus peers is attributed to the investment bank, given its scale. The unit currently accounts for roughly 64% of group risk-weighted assets (RWAs), compared to 21% for the UK retail and commercial bank and around 12% for the international consumer, cards and payments division, data from the bank shows.
Measured by return on average allocated tangible equity, the investment bank largely trailed the other two divisions over the past five quarters. Barclays declined to comment on its future investment bank strategy before the investor day.
Strategy questions
Barclays is not expected to announce a material downsizing of the investment bank, and analysts do not consider it necessary at this point. A change in narrative is needed to shift Barclays' share price over the short term.
Removing uncertainty around the unit's performance even partially could have a material positive impact on investor sentiment and, in turn, on valuation, Berenberg analysts said. This could be achieved by providing details on current and expected returns at individual businesses within the investment bank, as well as on the scale of recurring and cyclical revenues within the division.
UBS analysts believe Barclays needs to go a step further as plans to grow higher-earning divisions faster than the investment bank will not yield results soon enough to boost group performance and lead to a meaningful shift in the share price over the short term. At its current low return on equity and depressed valuation versus peers, Barclays is better placed capping RWA growth in the investment bank to generate more money for dividends and buybacks rather than chasing operating leverage, which relies on growing operating profit through higher revenues, the analysts said in a Jan. 11 note.
Higher payouts are seen as a key to boosting investor confidence in Barclays' overall performance, and the group is expected to announce Feb. 20 a specific target for capital returns over the next two years. Current consensus estimates suggest Barclays is expected to pay out roughly £5.9 billion in dividends and buybacks in 2024 and 2025.
Near-term goals
Barclays vowed to update its financial targets at the upcoming investor day, but some analysts do not see much room for an upgrade given that interest rate tailwinds in the retail bank are tapering off and investment bank revenues are still seen as volatile.
The sustainability of fixed-income, currencies and commodities (FICC) sales and trading revenues "remains a key question, despite Barclays claiming to take significant market share from rivals since 2019, while revenues from advisory and capital markets activities are facing stiff competition from Wall Street rivals," CFRA Research senior analyst Firdaus Ibrahim said in a Jan. 20 research note. Ibrahim projected "major cost cuts" and "lower financial targets" to be unveiled at Barclays' upcoming investor day.
Barclays said it targets return on tangible equity (ROTE) greater than 10% for full year 2023. Raising that to 11% for 2024 could be a stretch given weakening UK lending margins and trading revenues in the investment bank, the UBS analysts said, noting an 11% ROTE is more likely to be reached in 2025.
Cost control
Investment bank costs have also been largely higher than those of the two other core divisions, Barclays data shows.
Barclays confirmed it cut 5,000 jobs, or roughly 5% of its global workforce, amid its cost-cutting drive in 2023, Sky News reported Jan. 8. The cuts were concentrated in the UK retail and commercial bank but are expected to be expanded to the investment bank and the international consumer finance business in the coming quarters, S&P Global Ratings said in an analysis.
The group said it would post material cost charges for the fourth quarter of 2023, aiming to reduce its structural cost base. Analysts expect the figure to be between £750 million and £1 billion.