The Barclays (LSE: BARC) share price is up over 16% so far this month. Major breakthroughs in the Brexit negotiations have finally helped the bank’s shares recover from their historic lows, even though Brexit is far from a done deal.
But does the Barclays share price now signal value and further expansion, or the peak of misguided expectations? Here’s a closer look at how the bank’s valuation is affected by factors beyond Brexit.
Low valuation
In a thoroughly undervalued sector, Barclays seems like the most suppressed of them all. The stock currently trades at 0.41 times net tangible book value per share and 7 times annual earnings per share. Compare that to the banking sector’s average of 0.9 and 8.
The valuation is tempting, and the underlying fundamentals seem to be holding up well. The bank has already reported tangible equity at 9.3%, while its Tier 1 capital ratio has improved to 13.4%.
Its latest robust financial results encouraged management to increase the bank’s interim dividend by 20% year-on-year to 3p per share. The stock now yields 4.23%, which is perfectly in-line with the average FTSE 100 dividend yield.
Corporate raider steps back
Barclays has been a key target of New York-based activist investor Edward Bramson. He has been trying to secure a seat on the board and push the group to slash its investment banking division.
However, earlier this year the investor lost his bid to serve on the board and reports from the Telegraph published last week suggest he may be softening his approach altogether.
With the pressure dialled down and fears of a disorderly Brexit subsiding this year, the Barclays team could refocus on improving operations.
Reduced chances of negative interest rates
Another factor that may have improved the banking group’s valuation is the reduced risk of negative interest rates in Britain. My Fool colleague Harvey Jones described how negative interest rates could have a drastic impact on the banking business model and erode Barclays’ profitability over time.
However, with the Brexit deal now within sight and the benchmark base rate from the Bank of England standing at 0.75%, it seems the UK may be able to hold off negative rates for at least the foreseeable future. That improves the prospects of the entire banking sector.
Foolish takeaway
Bank stocks have been pummelled over the past decade and there’s still not much to inspire confidence. However, some of the risks seem to have subsided now that a Brexit deal is on the table and the sector’s profits seem to have recovered.
Barclays is the most undervalued banking stock of them all, trading at a severe discount to book value and offering a healthy dividend yield, so it could offer the widest margin of safety for investors willing to take a punt on the future of Britain’s financial sector.
