- Earnings pressure at securities unit to continue into 2017
- Bank could face $5.9 billion gap on target if markets sieze
Barclays Plc’s investment bank will drag on its share price into next year and the lender could face a shortfall of as much as 4 billion pounds ($5.9 billion) on its target level of capital, if client activity doesn’t recover, according to Sanford C. Bernstein & Co.
“Earnings pressure on investment banking and cards are likely to continue into next year and capital is still at risk if markets were to seize,” analyst Chirantan Barua said in a report Thursday, restating his market-perform rating. “The investment-banking downturn is not a two-quarter phenomenon, it tends to last longer” and the lender “is still the least capitalized in the U.K. -- not worth a risk at this stage.”
Chief Executive Officer Jes Staley has asked for patience as he restructures the bank and tries to address investors’ concerns about Barclays’s capital position. He’s pulled the investment bank out of nine countries, fired thousands of staff and frozen hiring to cut costs. He’s also selling down the firm’s Africa business, has cut the dividend and is buying back some of the company’s more expensive debt.
The moves have failed to reverse the stock’s decline. Barclays has fallen 16 percent this year compared with a little-changed FTSE 100 U.K. benchmark index. Barclays traded 0.3 percent down at 185.2 pence at 12:24 p.m. in London, exceeding Bernstein’s target price of 180 pence.
Global investment banks suffered their worst start to a year since 2009 as volatility in financial markets, concerns over trading liquidity and fears over global growth drove customers to wait out the turmoil. Echoing Bernstein’s prognosis, analysts at JPMorgan Chase & Co. estimate anemic trading volumes will depress second-quarter revenue 24 percent.
“If we have a protracted repeat of the first-quarter backdrop the bank could easily fall into a 3 to 4 billion-pound shortfall scenario against its 13 percent-plus target” capital ratio by 2018, Barua said. Bernstein isn’t forecasting a capital call for Barclays as the gap should be plugged by 2017 with the assistance of “accommodative” market conditions, it said.
“Investment banking still contributes 30 percent of income and consumes over 30 percent of capital, so it is difficult to see the stock lift-off without it performing,” Barua said. “We don’t think the investment banking downturn is about to turn” and “a downside scenario would mean more of a 25 to 30 percent correction in income with a depressed revenue environment playing out to next year as well.”
Other concerns for Staley include a potential drop in earnings at the Barclaycard credit-card unit, his best performing business, if unemployment rises, according to Bernstein.