Interactive Investor

Barclays shares - 270p or 50p?

30th November 2015 13:19

Lee Wild from interactive investor

Since peaking at 289p in July, Barclays has underperformed the FTSE All-Share index by over 15%. That means the "McFarlane bounce" - the rally between the announcement of John McFarlane's hire as executive chairman in September 2014 to this summer - has now fully unwound.

Two of Interactive Investor's regular chartists have raised serious concerns - but there are still brokers out there willing to back the struggling bank.

McFarlane warned in September in a leaked note to staff that there would be tough times ahead. "Our shareholders have been incredibly patient but won't be for long. I would like the bank to be in a strong position in 2017, so we need to get on with the hard work now," he said.

"We'll need to make some tough calls in the coming weeks and months to ensure we have the best chance of doing this."

That didn't stop Barclays' new chief executive Jes Staley - the former JP Morgan man who joins the board tomorrow - from buying 2.79 million Barclays shares at 233p earlier this month. He's currently nursing a paper loss of around £300,000.

Still, Investec thinks he'll be back in the black at some point.

"We think this is all slightly curious given (admittedly only modest) year-to-date progress on common equity tier 1 (CET1) (11.1%) and tangible net asset value (tNAV) (289p) with an absolute cost reduction programme which, in our view, is not entirely discredited," writes analyst Ian Gordon.

"We do not deny that the outlook for fourth-quarter 2015e appears characteristically bleak, but from here, on a 12-month view, we do still see value in the shares."

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Indeed, Barclays currently trades on just 0.76 times third-quarter 2015 tNAV, and could be capable of generating return on tangible equity (RoTE) of more than 10% in 2018. Jes Staley's strategic "refinement" on 1 March 2016 "may up the ante still further". It's why Gordon still rates the shares a 'buy' and trims his price target by a modest 5p to 270p.

Gordon thinks McFarlane's revenue-led recovery is too ambitious, pencilling in only modest growth of 2-3% over the next two years.  And achieving cost targets is critical - look for a drop in underlying costs to £14.8 billion in 2015. Adds Gordon:

"We continue to see a long slog ahead for Barclays as anaemic loan growth, weak revenues and the drag from legacy and non-core assets continue to imply that >10% RotE remains only a 2018e aspiration.

"Key to the achievement of this outcome remains delivery of the Jenkins plan for absolute cost reduction."

Last week, Barclays shares came within a penny of technical analyst Alistair Strang's "pretend trend from the lows of 2014" at 214p. Although Alistair isn't convinced a major break lower is likely, he admits that a closure below 200p would tick the last box in a series of arguments favouring an ultimate bottom of 151p.

Our other regular charts contributor John Burford pulls no punches. Four weeks ago, he wrote:

"With the increasing burden of bank regulation and the prospect of interest rates having bottomed out and now turning up, and of course with consumers and companies having maxed out on their credit cards, my outlook for the banking sector remains bleak.

"I believe the 2009 low at the 50p level will be tested in the next twelve months or so."

Read more about John's bearish prediction here.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.