Proactive Investors - RBC Capital Markets has revised its price target for Barclays PLC (LON:BARC), reducing it from 260 pence to 250 pence citing a combination the investment banking exerting a drag along with higher expenses.
Despite this reduction, RBC maintains its "outperform" rating for Barclays, reflecting confidence in the bank's long-term prospects.
The primary driver for the reduced price target is the updated forecast for Barclays' financial performance for the fiscal year 2024.
RBC has decreased its forecast for Barclays' adjusted profit before tax (PBT) by 5%. This 'tweak' is attributed to anticipated lower revenues in Barclays' investment banking (IB) division and increased operating expenses due to inflationary pressures.
Specifically, RBC's estimates for investment banking revenue growth have been tempered by a challenging market environment, with revenue growth expected to be 4% year-over-year. This includes a 5% increase in market revenues, a 17% rise in investment banking fees, and a 9% decline in other revenues.
Additionally, RBC notes that Barclays' costs are expected to be elevated in the second quarter of 2024. This is driven by two main factors: significant structural cost actions and union wage negotiations.
March, Barclays agreed to a 6.5% increase for vice presidents and below, contributing to higher operational expenses.
RBC estimates that the total adjusted costs for Barclays in Q2 2024 will be £4.10 billion, higher than the consensus estimate of £3.99 billion.
For the full year 2024, RBC projects Barclays' total expenses, excluding litigation and conduct charges, to be £16.5 billion, slightly above the consensus estimate of £16.4 billion.
The revision also considers the impact of increased swap rates, which present a headwind to Barclays' tangible book value (TBV) in the short term. RBC notes that swap rates have increased by approximately 30 basis points quarter-to-date, affecting the TBV.
Consequently, the tangible net asset value (TNAV) for Barclays is projected to be 343p per share at the end of Q2 2024, compared to the consensus estimate of 346 pence. This short-term impact on TBV is a contributing factor to the adjusted price target.
Despite these challenges, RBC's long-term outlook for Barclays remains optimistic. The bank's structural hedges are expected to provide a tailwind, particularly because Barclays' hedge is larger, will reprice faster due to a shorter residual weighted average life, and has a larger spread between the yield of swaps rolling on and those rolling off.
RBC's valuation model for Barclays uses a sum-of-the-parts (SOTP) approach, incorporating a cost of equity of 15.8% and a return on allocated capital for each division, supporting the revised price target of 250 pence.
In afternoon trading the stock was off 0.7% at 207.35p.