Barclays has come under pressure after the bank's broker cut its earnings estimates, mainly due to lower revenues from its investment bank and a £170bn reduction in its balance sheet.
Banks will have to ringfence their retail business from other operations under new rules, and analysts at Credit Suisse believe Barclays could be hit if it has to meet stricter leverage rules. Carla Antunes-Silva at Credit Suisse has restarted coverage of Barclay's following the recent rights issue with a neutral rating and 280p target price. She said the investment bank's return on equity could fall from 10% to 9% if the bank applies a 3% leverage ratio and to 7% with a 4% ratio:
If that were the case, we would expect an even stronger emphasis on cost cutting.
We continue to see downside risks to current consensus estimates...From the February strategic announcement up to the rights issue announcement in July [Barclays shares] performed in line with the market and since the rights announcement [have] under-performed by around 15%. We note that our estimates following the strategic plan presented in February were lower compared to consensus mainly due to lower investment banking revenue expectations.
We have reduced our underlying net income estimates by around 7% in 2013 as we have factored in the third quarter income guidance the group gave when filling the prospectus for the rights and reduced our investment banking revenues expectations for the fourth quarter.
We are also reducing by around 5% our 2014 and 2015 estimates largely driven by changes in investment banking revenue expectations (£9.8bn in 2014 and £9.3bn in 2015) where we expect the balance sheet to contract by around £170bn between the first half of 2013 and 2015, partially offset by better cost performance (an additional £500m on top of the £2.8bn already announced) and upgrades in UK retail banking and corporate banking.
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