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Traders were confident that Barclays would pass the European stress tests but it is interesting to see its performance compared with other British banks. The European Banking Authority (EBA) required banks to have a tier one capital ratio of 5.5%. Partly-nationalised lenders Lloyds and RBS scored 6.2% and 6.7% respectively, while Barclays is in a more comfortable position at 7.1%; HSBC also passed, sailing through at 9.3%.
The British banks aren’t out of the woods yet, as the EBA has been running scenarios where interest rates rise to six percent and property prices drop by 20%. The Bank of England will conduct its own test where interest rates rise to 6% and property rises fall by 35%, with the results of the more stringent UK test released on Tuesday 16 December. All the British banks took a hit on Monday because traders were concerned that Lloyds and RBS marginally passed the EBA test. I foresee similar jitters in the run up to the tougher UK stress test.
The narrow rate by which Lloyds passed the European examination caused traders to question if the bank will pay a dividend next year? Barclays is projected to have a dividend yield of 3.02% next year and 4.3% the year after. The projections put it on par with the average for EU banks, and the dividend projections may change depending on the BoE stress test.
The first-half update from Barclays was well received by traders, as its six month pre-tax profits declined by seven percent to £3.35 billion beating estimates of £2.69 million. Profits in the investment banking arm dropped by 50% as an increase in regulation and a decreasing risk appetite took its toll. The bank set aside £900 million for the mis-selling of PPI, which is a 33% drop when compared with 2013’s first-half PPI provision.
Equity analysts are bullish on Barclays. Out of the 36 recommendations 25 are buys, nine are holds and two are sells. The average target price is £2.79, and Barclays has the highest percentage of buy ratings out of all the British banks. The bank has lost nearly 19% of its value year to date, making it the second worst performing UK bank with emerging markets-focused Standard Chartered being the worst.
Traders will be using the third-quarter statement as a guideline for the annual figures which are due out in February 2015. The full-year forecast is as follows; revenue of £13.33 billion and net income of £2.5 billion.
The share price has found support at the £2.10 region, and a move below that would put £2 in sight. If trading revenues are higher and the bank is confident it has adequate capital it could move towards £2.36. However, should that level be taken out then the May high of £2.67 would be the next area to watch for.