Barclays slumps as Exane downgrades rating to 'neutral'

Barclays shares were under pressure on Wednesday as Exane downgraded the stock to ‘neutral’ from ‘outperform’ but raised the target price to 245p from 228p.

Exane said it had become more positive on Barclays earlier in the year due to an improved capital outlook after being “cautiously disposed” to the lender.

The issue now is that the shares trade at 0.8 times current tangible net asset value (TNAV) and Exane reckons they could struggle to progress.

“Although the TNAV multiple will be less of a focus as profits recover, it will likely provide a ceiling to valuation in the next 12 months given the lacklustre returns generated by the group," Exane analysts said.

The analysts said it is possible TNAV will come under material pressure through US litigation charges, the partial reversal of the cashflow hedge reserve, the cost of redeeming preference shares and the potential write-down of US deferred tax assets.

As a result, Exane believes TNAV could reduce by 35p by the end of 2017.

“This would overwhelm underlying earnings, driving TNAV lower and the multiple higher, perhaps to over 0.9 times,” Exane said.

“It could also drag on capital - perhaps by 130bps, slightly more than underlying capital generation.”

Exane sees adjusted earnings per share improving from 13p in 2016 to 24p in 2019, driving return on tangible equity from 5% to 8%.

Further subordinated debt opportunities would raise EPS to 26p and ROTE to 9%.

However, with limited distribution potential over the next three years, the present value of this eventual earnings stream is estimated to be 225p, in line with the 12 month target price of 245p.

Assuming investment banking revenue of £9bn in 2019, the clearing of expensive debt, an orderly disposal of the Africa business and non-core assets, a US corporate tax cut to 20% and an equity tier 1 ratio of 11-11.5% based on new rules, Exane said it sees a potential EPS of 30p and ROTE of 11% in 2019.

“Further assuming a cost of equity of 9% would value the shares at 300p in today's terms,” Exane said.

“But given the assumptions made we do not feel it is enough. In addition, many other banks would look equally attractive on this basis. After a good run, we downgrade the shares to ‘neutral’.”

Shares dropped 1.24% to 227.20p at 911 GMT.