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Could strong fundamentals boost Barclays share price?

Barclays [BARC] beat Q2 earnings expectations earlier this month (1 August) despite ongoing uncertainty over Brexit and rate cuts administered by the US Federal Reserve – a move which usually disadvantages the banking sector.

Barclays reported a net profit of £1.03bn; a drop compared to the £1.2bn recorded in the same period a year earlier, but ahead of the £989m expected by analysts polled by Reuters.

£1.03billion

Barclays' Q2 net profit

  

Meanwhile, return on tangible equity (ROTE) – a factor which measures the bank’s ability to deal with potential losses – came in at 9.3%, which, despite being down from 12.3% from a year ago, was a point of pride for the bank’s CEO Jes Staley.

Surpassing 9% ROTE for both quarters this year made it “the best statutory first-half performance that Barclays has had in nearly a decade” Staley told CNBC.

“We continue to be very confident that we can deliver greater than a 9% return on tangible equity for the year, and the second quarter was progress in that direction.”

 

 

Future outlook

Despite what Barclays referred to as a “challenging” first half of the year, the firm has its sights set on obtaining its full-year profitability target.

One way in which it plans to reach this goal is to reduce costs by more than previously planned. It cut 3,000 jobs in Q2, which the bank expects will show results in the second half of the year. Combined with a reduction in bonuses and lower investment spending, the bank said it is expecting to reduce annual expenses to below £13.6bn. Previous guidance had suggested it would spend £13.6-£13.9bn.

3,000

Number of jobs that Barclays cut in Q2

  

Another reason this goal may be obtainable is the better-than-expected performance of its international operation. While its UK unit produced weak returns for Q2 as a result of the pressure it faces from its mortgage lending business, its corporate and investment bank produced better results than the previous quarter, highlighting that diversification is currently helping the bank rather than hindering it. Its fees from investment banking were up 23% in, while it was up 10% in equities trading and grew 2% in FICC.

 

Bargain price

Barclays forward price to earnings (P/E) ratio is currently expected to be lower than competitors’ Lloyds Banking Group [LLOY] and HSBC [HSBA], while the share price currently stands at 6.72, compared to Lloyds’ 7.14 and HSBC’s 9.76.

And while this doesn’t signal significant share price growth, investors willing to collect income in the near-term will be pleased to see Barclays has also increased its dividend payment by 20%, as well as announcing an interim dividend of 3p per share. Furthermore, the firm said it expects the full-year dividend to be around three times that figure.

 

  Barclays Lloyds HSBC
Market cap £23.594bn £34.954bn £118.692bn
PE ratio (TTM) 7.64 9.39 8.50
EPS (TTM) 17.90 5.30 69.10
Quarterly Revenue Growth (YoY) -4.20% -12.60% 7.00%

Barclays, Lloyds & HSBC share price vitals, Yahoo Finance, 29 August 2019

 

Scepticism persists

Amid Brexit and global economic uncertainty, the firm’s share price has nevertheless fallen by over 25% since the results were announced. It suggests that the bank has to do more to convince investors that it can keep afloat during the ongoing turbulence.

Robert Stephens writes on Investomania: “Although there have been risks facing the UK economy, as well as the world economy, a decline of a quarter in its share price [in the space of a year] suggests that investor sentiment has deteriorated significantly,” he said.

“From my experience, trends can be persistent. Therefore, I’m cautious about the company’s near-term outlook, since weak investor sentiment may persist and lead to continued falls in its stock market valuation.”

“Although there have been risks facing the UK economy, as well as the world economy, a decline of a quarter in its share price [in the space of a year] suggests that investor sentiment has deteriorated significantly” - Robert Stephens of Investomania

Consensus

Despite reserve from some, however, Reuters’ consensus rating for Barclay’s is a strong ‘outperform’. Out of 17 analysts polled by Reuters eight consider it a ‘buy’, four an ‘outperform’, six a ‘hold’ and only three an ‘underperform’ or ‘sell’.

On 15 August, HSBC analysts reiterated its ‘buy’ rating with a price target of 200p, representing 47% upside if hit.

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