With the Barclays (LSE:BARC) share price down 12.8% in the past year, could rising interest rates and low price-to-earnings (P/E) ratios make now a good time to add this company to my long-term portfolio? Let’s take a closer look.
Rising interest rates
Barclays is an investment and retail bank operating on a global scale. It is one of the major players in the sector, along with the likes of Lloyds and HSBC. Interest rates are understandably incredibly important to such a business because they largely determine how much it can charge for customers to borrow money.
This borrowing could take the form of straightforward loans or mortgages. The Bank of England has already raised interest rates from 1% to 1.25% and has stated that further hikes are likely in the near future.
This could be good news for Barclays shares, because its profit margins on the borrowing products it sells could increase over the long term.
What’s more, housebuilders like Taylor Wimpey and Persimmon have recently said that they don’t yet see a slowdown in the housing market.
But might this only be a matter of time? With inflation, surging energy costs, and rising interest rates, many potential customers have less money in their pockets for deposits on new homes so may be less likely to take out a new mortgage.
In addition, the worsening economic climate may deter people from taking out other loans that they may not be able to repay further down the line. All these factors indicate that Barclays could have a bumpy road ahead.
Recent results and low P/E ratios
A look at the company’s financial results, however, paints a slightly more positive picture. For the first three months of 2022, income rose by 10% to £6.5bn compared to the same period in 2021.
Despite this, pre-tax profit fell by 7%. But this was largely due to charges incurred for the company issuing too many bonds in the US. The penalty was $500m
The business has initiated a £1bn share buyback scheme, although it has pushed it back to the second quarter of this year.
The share price may also be cheap when looking at P/E ratios. Barclays registers a trailing P/E ratio of 4.03 and a forward P/E ratio (found by dividing the share price by forecast earnings) of 5.4.
These are markedly lower than the P/E ratios of two major competitors, Standard Chartered and Lloyds.
| Stock | Trailing P/E ratio | Forward P/E ratio |
| Barclays | 4.03 | 5.4 |
| Standard Chartered | 11.76 | 8.53 |
| Lloyds | 6.12 | 6.79 |
Although P/E ratios are only one part of my analysis of a company, in this instance they suggest that I would be getting a bargain if I bought shares in Barclays soon.
Overall, this business isn’t without its troubles. The broader economic climate is concerning to me, especially given the potential impact on Barclays. On the other hand, the potential cheapness of the share price is attractive to me. Yet it’s not quite cheap enough in the current environment. I will hold off buying shares in the firm until I see an improvement in the economic outlook, but I won’t rule out a purchase at some future date.
