Barclays can beat low expectations in coming quarters, Merrill upgrades

Merrill, which moved its recommendation up from 'underperform' previously and upped its price objective to 220p from 180p, acknowledged that Barclays has had a difficult 18 months, with the 'reflation' of last year reversing as its investment bank was hit by lower volatility and "suffered from some self-imposed mishaps" as the previously productive IB balance sheet was shrunk and ineffective.

Analysts at Merrill think sentiment is "back at a low-ebb" such that consensus earnings per share forecasts for the current year "has finally rebased".

Looking at Barclays' plan to boost return on tangible equity 10%, around half of the increase is from "low hanging fruit, 10% from plausible growth, with the remainder coming from turning around the IB".

While Merrill is not currently forecasting that Barclays will achieve its goals, the rebased fourth-quarter expectations, an easy comparative to beat in the first quarter of 2018 and Barclays shares "at a post crisis relative low", the shares were felt to merit their upgrade.

"Barclays IB enters 2018 with a re-invigorated strategy, bigger balance sheet and new leadership team. Based on historic returns we think it is reasonable to assume that greater productive assets will drive revenues higher. With volatility back at lows, we think it also reasonable to expect a pick-up in volumes too," analysts wrote in a note on Monday.

The forecast for adjusted EPS falls by 19% in 2017 to 13.1p and 10% in 2018 to 18.1p.

"2017 should mark the trough and by 2020 we think it is plausible to believe that Barclays has 25p of earnings power, rising to 28-30p if management can deliver on its plans."