Shares of global bank Barclays are forecast to more than double over the next 12 months, according to Jefferies. The equity analysts at the investment bank expect shares of Barclays to rise to £3.20 ($4.07) — or 107% — from its current share price of £1.54. The London-headquartered bank’s stock also trades in the United States and is currently priced at $7.93. Why is Jefferies bullish? The British bank’s stock has underperformed and is valued below its peers over the past few months. The bank’s tangible book value, an indicator of what shareholders would receive if the bank were to liquidate, sits at around 0.4 times compared to peers trading at an average of 0.9 times. The disparity has led to the bank reportedly hiring consulting firm BCG to undertake a strategic review to address weaknesses in the share price. However, Jefferies suggests that large-scale buybacks might be the ideal solution to this issue. The bank’s analysts predict that Barclays can potentially buy back £2.2 billion worth of shares in 2024 and 2025, along with £1.5 billion this year. This would essentially reduce the number of outstanding shares, potentially increasing the value of the remaining shares. BARC-GB 1Y line Another aspect driving this positive outlook is Barclays’ “structural hedge,” according to Jefferies. Simply put, this is a method of managing the risk that comes with changes in interest rates. The bank has set aside a significant amount of money (£260 billion) as a hedge, some of which (£50 billion) will mature in 2023 and can be reinvested at higher market rates, according to Jefferies. The analysts said this move is expected to generate an extra £1.5 billion in income next year. “We estimate the bank ought to be able to generate around £19bn of profit over the course of 2023-2025, and we believe more of this should be returned to shareholders to better address the share price weakness as opposed to another strategy review,” said Jefferies analysts led by Joseph Dickerson in a note to clients on June 20. The analysts believe combining buybacks and the extra income from this hedge could enhance Barclays’ return on tangible equity, a measure of how well the bank uses shareholder investments to generate earnings. As the bank’s earnings increase, its share price could also rise, providing a better return for shareholders. ‘A good entry point’ Analysts at RBC Capital Markets also share this view. They have identified Barclays as the biggest beneficiary of the structural hedge tailwind. RBC’s analysis suggests that by 2025, the structural hedge could boost Barclays’ net interest income by 30% compared to 2022 levels and by 55% by 2027. They added that the market hasn’t fully appreciated the potential benefits of this income stream yet. “We see BARC’s current valuation as a good entry point. The bank is trading at the bottom end of its historical range and below its historical average,” said RBC analysts led by Benjamin Toms in a note to clients on May 12. RBC expects shares of Barclays, which trades with the ticker BARC, to rise by 49% over the following 12 months. “The valuation gap vs the sector has widened despite the bank performing slightly better than peers in building TBVps,” the RCB analysts added. But what if the global economy hits a speed bump, like a recession? According to Investec Securities strategist Roger Lee, the fear of a U.K. recession cannot be ignored. Barclays drives nearly 60% of its group revenues from the country. However, this fear has affected banks globally, not just those in the U.K. If a recession is avoided, the recent underperformance of banks could reverse. Despite the potential risks, the Investec strategist maintains a preference for banks as a “value” trade, suggesting they offer significant upside potential.
