Barclays PLC’s Shares Are Heading To 170p

Barclays (LSE: BARC) (NYSE: BCS.US) has not had a good year. A forced rights issue to bolster the balance sheet, an exodus of top management, slumping profits and now the dark pool fiasco have all left the bank’s reputation in tatters.

Unfortunately, Barclays’ latest scandal, the aforementioned dark pool fiasco, could prove to be the bank’s Achilles heel. There is reason to believe that as a result of this scandal, Barclays’ shares could fall to 170p.

Clients running 

When it was revealed that Barclays’ dark pool trading platform was favouring high-speed traders, many of the bank’s clients immediately expressed concern. And when clients discovered that Barclays was purposely misleading and withholding information from them, they immediately ran for the exit.

Indeed, within hours of the dark pool revelations, Barclays had lost some of its most high profile clients, including Deutsche Bank and the Royal Bank of Canada.

For Barclays this is a disaster. All companies need clients and customers but Barclays needs these big ticket clients more than ever right now, as the the bank has recently changed its strategy. Specifically, the bank  been cutting its investment banking exposure during the past few months, relying on a few key customers to keep the profits flowing in. So, with many large, high-profile clients turning their backs on Barclays, the group’s investment bank is likely to report a sharp downturn in sales. 

Dependant

Barclays’ investment bank was responsible for around 50% of group profit during the first quarter of this year. But with clients heading for the exit and Barclays’ management intent on scaling down the investment bank, it’s reasonable to assume that investment banking income is about to collapse. 

Assuming a worst case scenario, a 50% drop in investment bank earnings, Barclays’ overall group earnings per share are likely to fall by around 25%.

So, with the City forecasting that Barclays will earn 24p per share this year, a reduction of 25% will reduce 2014 earnings to 18p per share. This means that in the worst case, Barclays is now trading at a forward P/E of 11.6 — not overly expensive.

However, during the past five years Barclays has traded at an average P/E of around 9.5. If the bank’s shares were to return to this historic multiple, based on worst case earnings of 18p per share, Barclays’ shares would fall to 171p.

Of course, these forecasts do not include any fines Barclays may have to pay, which could cost the bank billions.