Bank Watch: Barclays outperformance is past sell-by date

Barclays’ shares may be running ahead of reality.

Bank Watch: Barclays outperformance past sell-by date

Barclays’ shares may be running ahead of reality. Since mid-November, stock in the UK’s No. 2 bank by assets is up 16%. That compares with London’s main bank index which has given up a rise half the size of Barclays’ to trade flat by Monday. Barclays even neared an incongruous match with its much larger U.S. rival JPMorgan, which has added 17% since 13th November. How are Barclays’ shares keeping pace with JPMorgan’s?

No nasty surprises

The answer is partly internal and partly external. Chiefly, despite reporting a £2bn full-year loss in February amid slipping revenues most causes—like losses from selling African assets—were already known to investors. Furthermore, the one-off charge linked to U.S. tax reform, responsible for another large dent, wasn’t a performance issue and followed similar costly adjustments at rivals. Investors weren’t necessarily that impressed by CEO Jes Staley’s confidence “in the capacity of this business to generate excess capital”. However the resumption of the group’s full dividend after a year-and-a half pause went a long way. Some investor relief was apparent in anticipation, whilst on-target costs pointed to improved visibility in 2018.

Attractive optics

At the same time, parlous as Barclays’ 21% tumble in quarterly trading revenue was, it still outperformed many large rivals. Growth at global lenders was after all mediocre last year as a cost reduction and efficiency boosting recovery phase drew to a close. Indeed at 2.8%, Barclays’s net interest margin is forecast to beat UK peers over the next 12 months, according to Thomson Reuters data. With the price of its shares relative to book value some 30 basis points below average, in line with a tardier recovery, a less demanding Barclays valuation has attractive optics too.

Powerful recovery while it lasts

None of this means Barclays is likely to pace the field in 2018. Whilst its UK consumer franchise is the most profitable around, international businesses will keep dragging on group returns. Hitting a 9% return on tangible equity target by 2019 would require revenue to grow by an implausible 10%. That’s before factoring in costs from Barclays’ numerous outstanding conduct matters. Still, recovery and price momentum are powerful forces with real growth in the sector still uncertain.

Thoughts on Barclays share price chart

After an arduous trek up from November lows, BARC last week arrived at the same overhead barrier that ended prior attempts last May and July. Resistance at 214p held though. A reversal at the end of February found support at the 21-day exponential moving average, but a flattening 200-day average and little clear absolute price support nearby point to another sustained failure for the time being. Buying could lose further traction if

-         Implied support from 38.2% of the rise from Brexit vote lows to cycle highs collapses

-         A nascent rising trend line that commenced in November gives way, opening up risks of a test of probably weak short-term support around 188p.

At this point, a break above 214p is the only way Barclays’ recovery would become credible on a technical basis.

Barclays Plc. share price chart – daily intervals


Source: Thomson Reuters and City Index

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