Barclays makes itself an easier target

Bad timing

Welcome as they are, Barclays’ more clearly defined financial performance goals and timelines have provided an easier target for sceptics on the group’s strategy. Timing is also less than fortuitous. Investors will recognise that Q3 was the most inchoate quarter in a transitional year. However Barclays’ stock was already amongst the most disappointing among European banks before Thursday’s third quarter release, so an extended horizon towards guaranteed targets—which are actually quite modest—has turned investor disappointment up several notches.

UK in flux

The impression that this newly calibrated Barclays has yet to get into gear also helps account for a sizeable share price ‘gap’ in early Thursday trading, with sellers having to accept prices some 2.5% lower than Wednesday’s close in order to get shot of their stock. Chiefly, the key measure of a bank’s ability to generate profits for shareholders, return on tangible equity (RoTE) at Barclays UK of 20.4% in the first half now looks increasingly unsustainable. 9-month return on average allocated equity was less than half at 9.4%. Note Barclays UK achieved 21.1% in Q3 2016.  UK returns can edge higher as impairments and costs moderate further, after their decline helped drive an annual rise over 9-months. With net interest income growth glacial across the sector and the impairment outlook difficult to predict though, we continue to see Barclays’ domestic business as a work in progress and early promise remaining difficult to match in the medium term.  In fact, Barclays’ basic profitability retreated across the board in Q3. Leaving out hits from like the loss on the sale of its Barclays Africa stake and another PPI charge, the group tally was 7.1% in the quarter against 8.1% at H1 and International was down 2.9 percentage points to 10%. This completes the picture of a group that will continue to lag rivals for some time.

What is “reasonable”?

Barclays now seems to agree. New targets announced on Thursday extend the horizon and lower the hurdle to faster growth. The 10% RoTE generally regarded as minimum for underlying profitability is now not forecast before 2020. The “reasonable timeframe” over which Barclays said it expected group and core returns to converge when announcing Q3 results last year will have been stretched from the perspective of many investors. At the time, the core had just hit 10.4%. Targets also exclude further litigation and conduct expenses, many of which remain in the pipeline. We think it was no surprise that Barclays’ shares were on track for their worst day since June 2016 at the time of writing. The group will update policy over how and when it will “distribute the returns” with full year results early next year. Shareholders do not seem optimistic that there will be many returns to disburse any time soon.

Followers of Barclays share price chart may not be surprised by the direction of the shares after its weak quarterly results though the extent and emphasis is unquestionably eye-catching. Having traded below one of traders’ most-used trend thresholds, the 200-day moving average (200-DMA), since July, BARC’s post-earnings tank has now pushed it underneath the 21-day exponential moving average (EMA). We suspect that this will be one of the occasions in which a stock is tardy to fill a gap, given the speed of the acceleration. Nor do we have much faith in Thursday’s apparent support level around 182.8p (it successfully held in September). It does however cohere with 50% of the 24^th June 2016 to Late February 2017 rise, suggesting the level could hold for a while yet. Probabilities tend towards the downside but the decline off the year’s highs all the way back in February continues to look orderly as a whole, even after Thursday’s slump. Note the channel trend and normative swerve of the price action at the ‘classic’ 38.2% Fibonacci (see blue ellipse) in July. The stock could yet reach the November 2016 lows it appears to be aiming for, but investors have had and will probably get more fair warning.

Figure 1 - Barclays Plc. daily chart