Barclays PLC (LON:BARC) shares edged lower as Deutsche Bank and UBS cut their target price on the stock after the bank reported third quarter results that fell short of market forecasts.
In the three months to September 30, pre-tax profit rose 31% to £1.1bn on the back of lower customer redress costs in the UK consumer bank. But profits missed consensus estimates of £1.43bn as a weak trading performance in the investment bank weighed.
READ: Barclays slumps as third quarter profit rises but investment bank struggles
Revenue in the quarter fell 5% to £5.17bn as bond trading revenues slumped.
Third quarter a clear disappointment, says Deutsche Bank
Deutsche Bank (DB) cut its target price to 210p from 226p, saying the third quarter results were a “clear disappointment” as Barclays downgraded its costs for 2017/18 and missed on revenues, making the task of reaching its 2019 targets harder.
Barclays guided toward operating expenses, excluding litigation and conduct, of £14.2bn-£14.3bn in 2017 and £13.6bn-£13.9bn in 2019.
“We think Barclays’ new targets for 2019 imply about 25p of EPS (earnings per share) – making the shares very cheap at c.7.5x earnings if the bank can get anywhere close to achieving these,” DB said.
“Much of the market skepticism is on revenue growth prospects, understandable in a quarter where the bank missed on revenues.”
Market 'overly bearish' on outlook for Barclays investment bank
However, DB maintained a ‘buy’ rating and believes the market is being “overly bearish” on the outlook for the investment bank, though the revenue environment for the division “remains challenging”.
“Barclays has a number of tailwinds (risk weighted asset recycling, higher rates, US Cards growth, UK mortgage growth, upcoming debt redemptions) which are not being priced in,” DB said.
“Investors should not expect a sudden improvement in 4Q17 or 1Q18 – but on a 12-month view, when these initiatives should begin to bear fruit, we think the shares offer good value.”
DB added that key downside risks include the cost of regulatory change, higher-than-expected litigation, disappointing capital markets, an unexpected spike in credit costs, and market and economic uncertainty surrounding Brexit.
Costs and revenue targets a tough sell, says UBS
UBS cut its target price to 220p from 235p but left its ‘buy’ rating. It noted Barclays’ targets for return on tangible equity (ROTE), excluding litigation and conduct, above 10% in 2020 and above 9% in 2019, based on a common tier equity 1 (CET1) ratio of around 13%.
UBS said while the ROTE targets represent “reasonable upgrades to consensus”, the route by which the firm aims to get there - investing in higher costs and aiming for better revenue growth - was “always going to be a tough sell”.
“Still, management have now provided a target CET1 (common tier equity) ratio, costs and cost/income ratio, replacing a previous open ended 10% ROTE target,” it said.
“This makes it pretty straightforward to estimate target earnings per share (26p, putting the stock on 7.0x 2019E earnings) and to hold the firm to account.”
UBS said the middle of the 2019 cost range is a £150mln operational expenditure increase compared with consensus, which marks a 2% pre-tax profit downgrade to market expectations for that year.
Cost flexibility 'almost as important' as revenue growth
Based the bank achieving a 58% cost to income ratio and reaching the mid-point of its cost guidance, UBS said Barclays would be aiming for income of £23.7bn, up 11% on the 2017 pre-results consensus forecast and 4% above 2019 expectations.
“Important for the share though: the market didn't believe in much income growth before anyway. If Barclays hits its spend target (straightforward, we think) and delivers consensus 2019 revenue - £1bn below plan – the stock would still only be on 8x,” UBS said.
“Shown within, demonstrating cost flexibility will be almost as important as revenue growth, we think.”
Shares dropped 1.19% to 181.07p in morning trading but clawed back some gains in afternoon to change hands at 182.15p.