Barclays’ (LSE: BARC) (NYSE: BCS.US) shares have got off to a great start this year. And as financial markets around the world become increasingly volatile, the bank could be set to outperform all expectations over the next 11 months.
Trading income
Unlike some of its peers, Barclays has prioritised the development of its investment banking arm over the past decade or so.
An investment bank is defined as a financial intermediary, which performs a variety of services, namely complex financial transactions. These include underwriting, acting as an intermediary between a securities issuer and the investing public, facilitating mergers and other corporate reorganisations, and acting as a broker and financial adviser for institutional clients. Additionally, investment banks usually have trading divisions.
Essentially, an investment bank facilitates many of the financial transactions that go on in the markets around the world. The more trading that takes place in these markets, the more business an investment bank receives.
What’s more, traders love volatility — no one can make money in markets that don’t go anywhere — so trading volumes usually increase as volatility increases.
And this is how Barclays is set to benefit from increasingly volatile markets.
However, Barclays is trying to sell off and divest parts of its investment banking arm. Reduced trading volumes have hit the investment bank during the past three or four years. So management has decided that the group as a whole is better off without a large investment bank.
Core businesses performing well
The logic behind this move is sound. Highly paid traders and investment bankers are expensive to keep on the payroll when business is slow. For this reason, the investment bank has become a relatively expensive part of the Barclays group.
Other divisions of the Barclays empire, are, however, performing exceptionally well. According to analysts, after stripping out the investment bank, Barclays’ core businesses, namely retail banking and Barclaycard are trading 15% ahead of expectations.
Further, when you account for the fact that trading at the investment bank is likely to have improved over the past few months, due to increasing volatility, it quickly becomes apparent that Barclays is set to outperform this year.
City analysts expect the bank to report earnings per share of 25.7p for 2015, followed by EPS of 30.70p for 2016. These figures put the bank on a forward P/E ratio of 9.1 and 2016 P/E of 7.7. With the trading environment improving and Barclays’ core divisions trading ahead of expectations, the bank is likely to outperform these expectations.
Dividend champion
City analysts expect Barclays’ EPS to expand by 50% over the next two years but over the same period, analysts expect the bank’s dividend payout to double. Analysts believe that the bank will support a yield of 5.2% by 2016; great news for income seekers.
