Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.
Today I’m looking at Barclays (LSE: BARC) (NYSE: BCS.US) to ascertain if it can make £10bn in profit.
Have we been here before?
A great place to start assessing whether or not Barclays can make £10bn in profit is to look at the company’s historic performance. Unfortunately, Barclays has never been able to make £10bn in profit, even in the run-up to the financial crisis when profits in the banking sector surged. Indeed, back during 2007, just before the financial crisis set in, Barclays only reported a pre-tax profit of £7.1bn, although this was a record for the company.
However, back during 2007 before the financial crisis began, banks were able to achieve abnormal levels of profit, as regulatory bodies were not as strict as they are today. As it turns out, a lack of strict regulation and the excessive levels of borrowing made by these banks in order to generate those abnormal levels of profit were two of the key factors that resulted in the near-collapse of the global banking system during 2008.
For example, a bank’s performance is usually measured in terms of return on equity — how much profit the bank makes based on shareholder equity. Barclays reported a return on equity of approximately 25% during 2006 but this has now slumped to under 5%, according to 2013 figures. This implies that it is going to be hard for Barclays to return to the level of profitability seen back during 2006/07.
But what about the future?
Nonetheless, it would appear that City analysts expect Barclays to report a pre-tax profit of £10bn during 2015. Barring any significant setbacks, Barclays should be able to hit this target and the bank’s net profit should exceed £10 billion in the years following.
That being said, investors should not become complacent as Barclays still faces a number of headwinds. For example, the recent revelation that the bank was facing a £12.8bn hole in its balance sheet, sent management into a spin and an emergency cash call had to be arranged. Barclays expects that this hole will be fully plugged by June of this year, although to meet this target the bank is seeking, “further leverage reduction opportunities”, which could dent future profitability.
What’s more, Barclays is still trying to rebuild its reputation after a number of scandals during the past few years and recently, the bank has come under scrutiny from regulators . However, as of yet, these two factors have not significantly impacted profits. Still, there is the ever-present risk that regulators could force Barclays to improve its capital ratios and decrease leverage, which would impact future profitability as the bank restructured operations to meet demands.
Foolish summary
Overall, current City projections forecast that Barclays will meet my profit target of £10bn by 2015. Barring any significant set-backs for the bank, I feel that this is a realistic target.
So, I believe that Barclays can make £10bn profit.