As you should know by now, I am not a big fan of Barclays (LSE: BARC) (NYSE: BCS.US) and the banking sector at this point in the business cycle.
But what if one of the most prestigious British banks were able to deliver a return on your investment of 25% before taxes, and excluding dividends, in 2015?
Too Good To Be True?
A 25% rise in Barclays stock implies a price target of about 300p, which is only 5% above the average stock price target from brokers, and about 20% below top-end estimates. For that to happen, you must believe that:
a) Results from the Bank of England stress test are reliable. If so, Barclays’ capital position is strong enough and dividends are safe.
b) Barclays will deliver stellar earnings growth into 2016.
c) The bank will improve its risk profile with regard to impairments, while cutting costs. If the bank’s impairment cycle has peaked, hefty fines will go down over time.
d) The bank’s marketing push will allow it to gain customers and market share vis-a-vis rivals.
Moody’s
Enter Moody’s, arguably the most important credit rating agency in the world.
It said last week that results of the PRA’s UK-specific stress tests on the eight largest UK banks and building societies demonstrate enhanced capital positions and improved asset quality for the system as a whole, and shows that the UK banking system has the capacity to withstand unexpected losses resulting from UK-specific risks.
Is this good news for Barclays?
Caveats
One caveat is that the revenues that the bank generates outside the UK amount to about 60% of the group’s total, as at the end of 2013, although Barclays is shedding assets in Europe and elsewhere.
It also emerged recently that the bank may have to set aside more than the £500m it had pencilled in order to settle allegations according to which some of its traders helped rig the foreign exchange market. That’s already priced into the shares, the bulls would argue.
Political Risk
How important, however, is the UK government’s recent decision to withdraw its legal challenge to the EU legislation that caps bankers’ bonuses? Does it show weakness of intent and action?
How about “political risk” in the year of the general elections?
It’s difficult to say, but a strong government is needed for Barclays stock and the broader banking sector to grow at a fast pace in the next few years.
The FTSE 100 grew in line with the S&P 500 for just less than a decade since Black Monday in October 1987. It recorded a +289% performance between November 1987 and the summer of 1998, when the Asian crisis hit the markets worldwide. Barclays stock registered a +500% performance over the decade starting July 1988, and that followed big structural changes in the way trades were placed and executed, among other things — check out the Big Bang and the deregulation of the financial system in the UK in the 80s!
Since the stock market rally started in March 2009, the FTSE 100 has underperformed the S&P 500 by about 100 percentage points. A top-down approach suggests political risk should not be overlook in 2015 and beyond…
