The weaker markets outlook and uncertainty around future interest rate rises are marring earnings visibility for Barclays PLC (LON:BARC), Jefferies said.
Jefferies cut its forecast for pre-tax profit in 2019 and 2020 by about 8% and believes that the bank’s target for return on tangible equity (ROTE) is only achievable when viewed on an allocated equity basis.
“Management could respond to this dynamic via the cost lever and we await further details on cost guide either at first quarter or first half results,” Jefferies said.
“We remain ‘Buy’ on the name but management have to execute on ROTE expansion to drive a rerating of the shares lest they become a value trap.”
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The broker expects slower corporate and investment banking results in the first quarter and for the remainder of the year. It also sees modestly lower margins in the Barclays UK business this year.
“On our revised numbers, we expect only a 9% ROTE by 2020 and we can only get to a 10% ROTE by 2021 when looking at returns as a proportion of allocated equity (using an assumed CET1 target of 13.4%),” Jefferies said.
“Our estimates imply a '19E ROTE of 8.8% rising modestly to 9.0% by '21E, which compares to management's guidance for >9% in 2019 and >10% in 2020.”
Barclays has previously guided to costs of £13.6bn to £13.9bn in 2019 but Jefferies said it wonders whether management might seek to revise this target in order to deliver on ROTE aspirations in light of a more challenging market outlook.
The investment bank noted that Barclays chief financial offer, Tushar Morzaria, has referenced the £1.6bn compensation pool in the investment bank as a source of near term earnings flex so there would seem to be “greater near-term visibility on cost flex than for markets-related revenue”.
Jefferies maintained a ‘buy’ rating but raised its target price to 280p from 263p, saying it sees second half revenues benefiting from comparatives in the year-ago period when markets slumped.
Shares edged up 0.5% to 168.58p.