HSBC ups Barclays to 'buy' on non-core disposals

“The disposal of business held within the Non-Core businesses is a management priority for 2016, and the expectation is that negative income and expenses within Non-Core will be significantly lower in future years,” HSBC said.

It said management’s contention is that core Barclays, even including the investment bank, is a strong franchise with strong underlying profitability, so the fastest way to produce shareholder value is to exit non-core activities as soon as possible.

“A simple explanation for the group’s current £28bn market capitalisation is its £48bn net tangible equity with a sustainable return of 7% evaluated against a cost of equity of 12%. The sustainable return might be considered as a 12% return from the businesses constituting Barclays’ Core offset by a five percentage point drag from Non-Core.

“If Non-Core was then entirely eliminated and its residual £8bn of tangible equity transferred to Core, then the Core return would be diluted down but the group would still be left with an overall return of 9.9%. It should then, theoretically at least, have a market value 40% higher than at present.”

HSBC said the main downside risks stem from higher household and corporate impairments as the UK economy slows due to the exiting of the European Union and its single market.

At 1100 BST, Barclays shares were up 3.3% to 172p.