Broker ditches Barclays 'buy' advice

After surging 26% since October, one analyst has decided that Barclays shares are no longer cheap, prompting a ratings downgrade and more conservative target price.

"The main plank of our investment case for buying Barclays over the past year has been its extreme relative and absolute cheapness, reinforced by an absolute cost reduction story and the material FX tailwind in evidence in the Q3/Q4 2014 results, which, we believe, is likely to continue in 2015," wrote Investec Securities analyst Ian Gordon on Wednesday.

"However, now trading on 0.9x 2015/16e tNAV [tangible net asset value], we think the valuation case is no longer overwhelming in the context of our deteriorating expectations for the scale and pace of RoE [return on equity] recovery."

Gordon has cut his advice from 'buy' to 'hold' and trimmed his price target from 295p to 270p, although that is still higher than the current share price (see chart).

Barclays has "materially greater" exposure than UK peers to the sharp increase in the bank levy announced in last week's Budget - up from 0.156% to 0.21% - argues Investec. "We believe the timescale for RoE 'normalisation' has now been pushed back even further - to 2018e. We think Barclays faces a 2015e bank levy of c.£700 million, (which is not tax-deductible)."

That, coupled with the stronger dollar, mean Barclays is less likely to beat its 2015 absolute adjusted cost target of £16.3 billion, down from £16.9 billion in 2014 - Investment Banking and Non-Core had been expected to do most of the "heavy lifting".

"We also think that Barclays' dividend growth aspirations have, in effect, been deferred until 2016. We cut from Buy to Hold and reduce our RoE-g/CoE-g derived TP to 270p (from 295p). On 0.9x 2015/16e tNAV (ex-div) we are not negative on Barclays on a 12-month view, but equally, we would not add to positions at this level."

A first-quarter trading update is scheduled for 29 April.

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