With Brexit (apparently) just around the corner as the UK heads towards a potential no-deal departure from the European Union, UK banking stocks have taken a battering due to the ongoing uncertainty.
As well as Brexit, UK banks have been hit hard by a PPI scandal in which they have been forced to pay billions to customers who were mistakenly sold worthless cover. A rush of claims towards the end of the deadline could push the final compensation bill for the sector to over £50bn
Needless to say, some of the biggest financial institutions in the FTSE 100 have seen volatility in their share prices as a result, including the likes of Lloyds Banking Group and Royal Bank of Scotland Group.
However, since the passing of the deadline on 29 August, shares in Barclays (LSE:BARC) have recovered somewhat. The share price currently sits at 145p, up around 10% in the last month and leading some investors to question whether the underperformance it has experienced for the last few years is over.
I have to say, I’m not entirely convinced.
No-deal Brexit
On the one hand, Barclays’ profitability has remained healthy despite Brexit uncertainty. Underlying profits during the first half of the year amounted to £3.1bn, higher than in any opening two quarters for the bank in the last nine years.
Analysts have forecast that profits for 2019 will reach £3.7bn, amounting to 21.8p per share. That would leave Barclays trading on a forward P/E ratio of less than 7, a tempting figure for value investors.
However, there are a number of factors that would lead me to remain cautious about the prospects for Barclays shares at this point.
The difficulties potentially facing those in the financial sector as a result of Brexit has been well documented, particularly in the increasingly likely scenario of no-deal. While Barclays may have a certain amount of diversification through its investment banking operation, a hit to the UK economy following no deal would affect business at the bank.
Interest rates
Perhaps even more worryingly, as pointed out by Harvey Jones, stagnating interest rates could actually turn negative, such as in the eurozone. Negative interest rates are thought of as a drastic measure to stimulate economic growth, but have become more commonplace for central banks recently.
While the Bank of England’s current governor Mark Carney may not be entertaining the idea just yet, it is difficult to rule out anything as we head towards the Brexit deadline on Halloween. Barclays’ net interest margins are already falling, and any further rate reductions from the BoE would cut those margins to an even greater extent.
The total compensation bill for Barclays as a result of the fallout from the PPI scandal could be as high as £11bn, no mean sum even for one of the biggest companies in the Footsie.
For me, there are just too many risks involved in buying banking stocks such as Barclays at the moment, however it may well be worth reviewing that stance when the after-effects of Brexit become clearer.
