Barclays adds scale, income and profits with Tesco Bank deal, says Shore Capital

Shore Capital has reiterated a 'buy' recommendation on Barclays after its deal to takeover Tesco Personal Finance for £600m, saying that the stock should double from current levels.

Barclays said on Friday that it is to acquire the retail banking business of Tesco Bank, getting its hands on £8.3bn of gross unsecured lending balances, including £4.2bn of credit cards and £4.1bn of unsecured personal loans, along with £6.7bn of deposits

The companies also unveiled a 10-year partnership to market and distribute credit cards, unsecured personal loans and deposits using the Tesco brand, as well as explore other opportunities to offer financial services to Tesco customers.

Shore Capital analyst Gary Greenwood said that the deal shouldn't impact Barclays' plans for financial returns or shareholder distributions given the limited expected impact on the bank's CET1 ratio.

However, Greenwood said that while the deal valuation looks attractive at 0.6 times book value, "we note that Barclays stock currently trades at c.0.4x book and so investors will no doubt rightly question whether this is the best use of capital, with an enhanced buy back potentially preferable.

"That said, it will add incremental scale, income and so profitability to Barclays already strong credit card business, which has seen balances shrink in the UK following the pandemic."

Ahead of Barclays' annual results due on 20 February, Greenwood said the focus will be on "improving operational and capital efficiency to drive higher return on equity, while also growing distributions to shareholders".

The broker has set a fair value estimate of 290p for Barclays shares, compared with Friday morning's level of 142.06p, down 0.8% on the day.