Barclays Notches Sell-Side Upgrade On Capital Progress, Dwindling Regulatory Risks

Goldman was previously a Barclays PLC (ADR) BCS bear due to concerns about the capital building the company had to undergo to narrow the gap to its U.K. and EU investment banking peers and meet financial regulations. The firm's thesis on the UK banking giant changed Thursday.

The Analyst

Goldman Sachs analyst Martin Leitgeb upgraded Barclays from Sell to Neutral and increased the 12-month price target for its U.K.-listed shares by 10 percent.

The Thesis

Barclays has reduced the balance sheet of its U.S. intermediate holding company, or IHC, by 21 percent since the fourth quarter of 2016, Leitgeb said in a Thursday note.

The U.S. IHC consumed $14 billion of Tier 1 capital compared to $18 billion the fourth quarter of 2016, Leitgeb said.

"We believe this can be attributed (at least in part) to the rebooking of assets elsewhere within the group's structure," the analyst said. "This implies greater capacity to capitalize the 'stump' within Barclays' non-ring-fenced bank." 

Goldman's Common Equity Tier 1 — a banking regulation metric — estimate for Barclays' American holding company increased from 10.4 percent to 12.5 percent. 

Goldman sees receding financial regulation risk in the wake of recent commentary from the Fed that suggested greater flexibility in the application of Foreign Banking Organization rules as well as the intention to revisit the Volcker rule.

Barclays has not sounded out any upward pressure on its group capital targets, unlike some of its U.K. peers, Leitgeb said. 

Citing an expected UK rate increase and a lower tax,Goldman raised its earnings per share estimates for the 2018 to 2020 period by 4-6 percent. This, along with Barclays' stronger Q4 capital progression, led to the price target revision, the analyst said. 

The Price Action

Barclay's U.S.-listed ADRs are up about 7 percent over the past year.

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