Despite Pressure on Net Interest Spread, Barclays Stock Can Still Grow

[Updated 12/15/2020] Barclays Update

We believe that Barclays stock (NYSE: BCS) has an upside potential of 25% in the near term once the low-interest-rate environment improves, leading to a growth in core banking revenues. BCS trades at $7 currently and has gained 25% in value year-to-date. It traded at a pre-Covid high of $9 in February and is trading 21% below that level now. Also, BCS stock has gained 87% from the lows of $4 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government, which has helped the stock market recover to a large extent. The stock is leading the broader markets (S&P 500 is up about 65% since March lows), as investors are positive about the growth in Barclays’ Investment Banking business – the bank’s investment banking revenues increased by 29% y-o-y to £1.7 billion in Q3 primarily driven by a 23% jump in FICC (Fixed Income, Currency & Commodity) trading revenues.

Barclays is heavily dependent on its core banking, which contributed around 55% of the total revenues in 2019. The bank has suffered due to the Covid-19 crisis, as the lockdown in various cities across the globe has distressed industrial and economic activity, affecting the loan growth. Moreover, the impact is further exacerbated by a drop in interest rates, which is likely to negatively impact the bank’s net interest income – nine months consolidated net interest income from Barclays UK and Barclays International businesses have declined by 11% and 10% respectively on a year-on-year basis. Further, uncertain economic conditions have affected the loan repayment capability of customers, increasing the risk of loan defaults. The bank has almost tripled its provision for credit losses to compensate for that risk – up from $1.39 billion on 30th September 2019 to $4.35 billion by Q3 2020. However, we expect the situation to improve in the coming months, driven by a recovery in demand and gradual improvement in the economic conditions. Additionally, the decline in the provision for credit losses can improve Barclays’ profitability in the near term, providing a boost to the bank’s stock price. Despite the rally in Barclays stock since late March, we believe that the stock has some more room for growth in the near future provided there is no sudden uptick in the Covid-19 cases leading to further lockdown restrictions. Our conclusion is based on our detailed analysis of Barclays’ stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

[Updated 10/26/2020] Barclays Stock Offers Sizeable Gains As Economic Conditions Improve

Barclays stock (NYSE: BCS) has a 60% upside (back to pre-crisis level) in 1-2 years as the lower interest rate environment improves and GDP sees some recovery, leading to a growth in total loans and net interest income. Lower provision and stable NPL (Non-Performing Loans) can improve Barclays’ profitability in the near term – providing a boost to the bank’s stock price.

Barclays stock currently trades near $5.83 and it has lost around 40% in value so far this year. It traded at a pre-Covid high of $9.32 in February, and it is 40% below that level now. Also, the stock has gained around 50% since its March lows of $3.84. Having said that, we believe that the stock has an upside of nearly 60% from its current level driven by expectations of improving demand and gradual improvement in economic conditions following the lifting of lockdowns. Our conclusion is based on our detailed analysis of Barclays’ stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

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  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 55% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how Barclays and the broader market performed during the 2007/2008 crisis

2007-08 Financial Crisis

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of the S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Barclays vs S&P 500 Performance Over 2007-08 Financial Crisis

Barclays stock declined from levels of around $36 in September 2007 (pre-crisis peak) to levels of around $4 in March 2009 (as the markets bottomed out), implying Barclays stock lost 89% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $14 in early 2010, rising by 245% between March 2009 and January 2010. In comparison, the S&P 500 declined by 51% before recovering by 48% between March 2009 and January 2010.

Barclays Fundamentals

Barclays’ revenues have decreased from around $34 billion in 2015 to $28 billion in 2019, primarily due to the low-interest environment and sub-par performance of its UK retail segment. Nevertheless, Barclays’ earnings per share grew from -$0.14 per share in 2015 to $0.74 in 2019. However, the bank’s Q3 2020 net revenues were 6% below the level seen a year ago, while the EPS figure for the quarter fell from $0.30 in Q3 2019 to $0.20 in Q3 2020.

Conclusion

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment.

Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to around $9.32 once economic conditions begin to show signs of improving. This marks a full recovery to the level Barclays stock was at before the coronavirus outbreak gained global momentum.

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