In this article I am looking at why successful streamlining is set to thrust Barclays’ (LSE: BARC) (NYSE: BCS.US) earnings skywards.
Streamlining process clicking through the gears
In a bid to distance itself from the excesses of previous years, Barclays is putting the pedal to the metal on creating a more streamlined and cost-efficient bank. Indeed, the British banking institution announced earlier this month that it was taking the hatchet to its underlying cost reduction cost targets, and now expects to slash underlying expenses to £17bn this year, down from its prior goal of £17.5bn.
And for 2015 it slashed the target to £16.3bn, down from the previous estimate of £16.8bn. These figures compare starkly with last year’s underlying cost base of £18.5bn during 2013.
As part of its plan to create a ‘repositioned, simplified and rebalanced‘ entity, Barclays disclosed plans to significantly scale back the size of its investment bank arm. The division will be responsible for under a third of all risk-weighted assets by 2016, versus around half at present, resulting in the loss of 7,000 more staff and underlining Barclays’ commitment to exiting more riskier activities — the firm had also announced plans to axe its commodities trading desk at the end of April.
The institution expects to cut around 19,000 jobs across the group within the next few years as its restructuring package clicks through the gears. New chief executive Anthony Jenkins is expected to announce a raft of further branch closures across the UK as part of the bank’s Transform restructuring package, compensated for by a huge investment in technology — including its online banking offerings — as well as its back-office operations.
City analysts expect this extensive transformation to drive earnings through the roof in the medium term, with growth of 58% and 24% predicted for 2014 and 2015 respectively. These figures leave the bank dealing on P/E ratings of 9.6 and 7.7 for these years, well within the bargain territory of 10 times prospective earnings or below.
In my opinion Barclays’ relative cheapness makes it an excellent pick for those seeking a great value banking stock. I believe that the company’s evolving focus towards the UK High Street and away from less risky operations, boosted by its ongoing efficiency drive, promises to blast earnings higher in coming years.