On Thursday, Deutsche Bank initiated coverage on Barclays (NYSE: BCS) stock with a Buy rating and set a price target of GBP270.00. The firm highlighted a favorable risk asymmetry, citing a tangible net asset value (TNAV) expected to increase to 460p by the end of 2026, up from 335p as of March 2024.
The bank's downside protection is seen as being supported by the growing TNAV, while the upside potential is linked to Barclays' ability to meet or approach its group targets.
Notably, Deutsche Bank pointed out the potential for Barclays to achieve a greater than 12% return on tangible equity (ROTE) by 2026. Even with a more conservative forecast of a 10.5% return in that year, Barclays' shares are trading at approximately 4.7 times earnings, with a free cash flow (FCF) yield of around 20%.
The analyst from Deutsche Bank also mentioned that Barclays' management is showing confidence in their strategy by setting high internal performance benchmarks.
Maximum long-term incentive plan (LTIP) awards for management are contingent on a ROTE of 14% in 2026, with a requirement of an average return of 10% over the next three years.
While acknowledging risks such as investment banking revenue volatility and U.S. card impairment, the analyst suggested potential positive developments for Barclays' UK operations.
After an anticipated bottoming in net interest margin (NIM) this year, the firm expects an above-consensus improvement in 2025 and 2026. This forecast is partly based on approximately £170 billion of structural hedge maturities, about 60% of which relate to Barclays UK—a significant factor given the scale of its assets in earnings at risk (AIEA).
The initiation of the Buy rating reflects Deutsche Bank's view on the financial institution's share value and its management's commitment to achieving robust financial targets in the coming years.
InvestingPro Insights
Barclays (NYSE: BCS) presents an interesting case for investors, with a market capitalization of $39.62 billion and a price-to-earnings (P/E) ratio standing at 8.03, which further adjusts to a lower 6.85 when looking at the last twelve months as of Q1 2024. This suggests a potential undervaluation when compared to industry averages. The bank's revenue for the last twelve months as of Q1 2024 was $29.31 billion, despite a slight decline in revenue growth during that period.
Investors seeking income may be attracted to the bank's dividend yield, which is notably high at 4.88%, coupled with a dividend growth of 8.87% in the same timeframe. Additionally, the stock has experienced a remarkable 51.02% three-month price total return as of Q1 2024, indicating strong recent performance in the market.
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