Barclays PLC (LON:BARC) shares edged higher on Monday after Berenberg upgraded its recommendation to ‘buy’ from ‘hold', saying it expects improved returns from the investment bank arm.
The lender has come under increasing pressure from activist investor Edward Bramson wind down parts of the investment bank that do not directly serve corporate clients.
Call for chairman John McFarlane to resign
Bramson, whose investment vehicle Sherborne Investors took a 5% stake in Barlcays in February, has also called for chairman John McFarlane to resign as part of his lobby for a major shake-up of the bank.
Berenberg noted that concerns around the investment bank have driven a 15% drop in Barclays' shares in the year to date.
“Despite our cautious investment bank revenue outlook, and past concerns around strategy, the market’s expectation of a 5.5% return on tangible equity (RoTE) from Barclays’ investment bank is too low,” the broker said, raising its target price to 220p from 200p.
“It has the strongest franchise of any non-US bank in the profitable US investment bank market and is gaining market share. We believe Barclays’ investment bank returns can rise towards 9% by fiscal year 2020 with group returns bolstered further by its best-in-class UK business.”
In the first half, Barclays’ corporate and investment bank saw total income rise 1% to £5.4bn, largely due to a strong performance in the equities division. The division posted a 17% rise in pre-tax profits to £2bn.
READ: Barclays first half profits slide as litigation and conduct costs bite
Berenberg said the investment bank is “successfully growing”.
“Specifically, it achieved top-two year-on-year revenue improvements in every European IB market during H118, as well as US equities and FICC. While sustaining these gains is not guaranteed, execution risks from not growing the IB are now less.”
The broker added that it has long argued that the bank’s UK division is “best-in-class”.
“Loan growth has been admirably countercyclical and Barclays is less exposed to consumer credit than many perceive.
“Despite this prudence, Barclays’ UK revenue yields are higher and more stable than peers’. Accounting for 40% of PBT and generating high-teen RoTEs, we believe this business provides a profitable bedrock of stability.”
Shares rose 1.1% to 173.7p in morning trading.