The Barclays (LSE:BARC) share price hasn’t exactly had a great start to 2022. In fact, the stock is down by almost 25% since the year began (and down 11% over 12 months). Historically, bank stocks haven’t been the best performers. And it’s not hard to see why.
With interest rates being kept so low for over a decade, profit margins on lending activity have been rather tight. Which only makes the recent tumble ever more confusing. After all, now that interest rates are on the rise, surely the Barclays share price should do the same? Let’s explore exactly what’s going on.
Seemingly solid performance
Despite what the Barclays share price would suggest, the business seems to be doing rather well. Looking at the latest quarterly results, the bank’s total income actually increased by an impressive 10%, reaching £6.5bn. What’s behind this?
On the investment banking side of the business, the recent volatility in the stock market has created numerous opportunities to make profitable trades. So it’s hardly surprising that income from equities has enjoyed a sizable boost, even with client fees being cut.
But on the commercial banking side of the equation, performance has also improved. As I previously mentioned, rising interest rates directly translate into higher lending margins. Combined with the UK’s recovering mortgage lending environment, it’s not surprising to see income climb. This growth was even further accelerated by an increase in consumer spending during the three-month period.
Having said that, profits did suffer. It seems the bank got slightly carried away and overissued securities in the US, landing it with a £0.5bn fine by the SEC.
Bad behaviour appears to be synonymous with the banking industry. However, from a purely capitalistic point of view, this penalty is ultimately a one-time expense that doesn’t compromise the firm’s long-term strategy. And it seems management would agree, as it has announced the resumption of its share buyback programme once its debacle with the SEC has been resolved.
So if Barclays is performing well, why is its share price down by almost a quarter this year?
Fears surrounding the Barclays share price
There are undoubtedly multiple contributing factors to Barclay’s recent share price decline. However, the primary catalyst appears to stem from rising investor fears. With inflation and interest rates on the rise, energy prices skyrocketing, a war in Eastern Europe, and supply chain disruptions all landing simultaneously, the risk of a recession is elevated.
Needless to say, that’s bad news for the bank. Why? Because if consumers stop spending, business begins to slow, resulting in lower lending activity while simultaneously increasing the risk of default on existing loans. In other words, even if interest rates are up, the banks may not be able to capitalise on the opportunity.
With this in mind, it’s not surprising to see the Barclays share price suffer. But from a valuation perspective, the stock now trades at a measly 4.2 times earnings. That, to me, looks exceptionally cheap. Therefore, despite the risks, this looks like a potentially lucrative value investment for my portfolio today.
