Market Analysis

Goldman Sachs has begun coverage of Barclays plc (LON) with a "buy" recommendation, signaling a pivotal moment for the bank as it shifts its focus towards higher-return business segments.

Analysts at Goldman Sachs predict strong growth for Barclays, forecasting an earnings-per-share increase that is nearly double the average for the sector over the next few years.

Despite Barclays' share price rising over 40% year-to-date, it continues to trade at a discount relative to both its historical performance and the wider European banking sector.

Goldman Sachs has set a price target of 290 pence for Barclays, suggesting a potential upside of 27% from current levels.

The bank's optimistic outlook is primarily attributed to Barclays' strategy of reallocating capital towards its UK operations and optimizing resources within its Investment Bank.

Barclays is anticipated to shift around £30 billion of risk-weighted assets into its UK franchise, which should enhance profitability through higher-yielding initiatives, including its US credit card business and a structural hedge designed to protect net interest income from declining rates.

This strategy is generally viewed positively, with analysts expecting a return on tangible equity (ROTE) exceeding 11% from 2024 to 2026.

While Barclays' investment bank remains a vital component of its operations, it faces scrutiny regarding capital allocation. Goldman Sachs pointed out that Barclays plans to guide its Investment Bank towards more capital-light sectors, such as mergers and acquisitions (M&A) and equity capital markets, in an effort to enhance profitability.

Although earnings from these areas are projected to grow, the investment bank will still encounter challenges due to high operational costs.

Goldman Sachs analysts also mentioned that Barclays may not achieve its 12% ROTE target for this division, instead estimating a more cautious 10.9%.

This rebalancing initiative does come with risks. Analysts have identified potential obstacles, especially concerning the performance of Barclays' US consumer banking division and the overall UK banking landscape.

The upcoming UK government budget, scheduled for later this month, may introduce tax policy changes that could affect the bank's financial outlook.

Nevertheless, Barclays' diversified global portfolio, particularly its US presence, is considered a safeguard against localized difficulties.

Paraphrasing text from "Reuters" all rights reserved by the original author.