Barclays Equity/CDS Spread Hits Year-Low; Leverage Weakening

Barclays (BARC LN); following our financials theme around buybacks and looking cross asset, worth noting the year-low spread between Barclays’ equity and CDS (see graphic).

• BARC announced a GBP10bn equity buyback over the coming three years, which equates to 40% of the current market cap. Mechanistically, this leverages EPS higher, hence the positive equity reaction.
• However, revenues missed expectations by 3% and look to be showing no growth in FY24 based on pre-results consensus. This looks likely to be downgraded. With further restructuring coming through, the operating cash flow from the business is likely to be lower in FY24.
• The CET1 ratio was 13.8%, lower than peers and down at NatWest’s level for a much higher risk profile. This looks set to track sideways, at best, under the weight of that buyback. Counter-cyclical buffer requirements, as rates fall could impact that, too. So, that confluence of lower operating cashflow and relatively weak leverage appears to question the CDS performance recently.