Dozens of FTSE 100 stocks have seen their share prices fall over the past year as investors have become increasingly concerned about the health of the UK economy.
One such stock is Barclays (LSE:BARC). The banking giant is down 18% over the course of the year, and has posted some disappointing results.
But it’s also the cheapest bank on the FTSE 100, trading with a price-to-earnings ratio of just 4.2. So is now a good time to buy Barclays stock?
Cheap for a reason?
On the surface, Barclays hasn’t had the best year. And that’s largely due to securities sold in error. The trading blunder saw the UK’s second largest bank fined $361m by the US regulator.
Management recently confirmed that the securities issue has now been resolved. They inferred that the total financial impact hadn’t changed from previous guidance — putting the cost at around £1bn.
Economic challenges are also impacting the share price. The company’s bad debt provisions have been rising considerably. Impairment charges for the third quarter rose to £381m, up from £120m a year ago.
But it’s worth noting that these impairment charges aren’t as big as some other banks, and that’s due to Barclays’ diverse income streams and lower exposure to the UK and China. As a result, profit before tax had room to grow 6% to £2bn.
There are more reasons for optimism too. The UK only accounts for just under a third of total income, and that should provide some shelter from the country’s economic woes.
Tailwinds
Interest rates are rising around the world and banks are net beneficiaries of this. It means they earn more interest on the money they lend, and more interest on the cash they leave with central banks.
In the third quarter, the net interest margin (NIM) — the difference between rates on loans and deposits — reached 2.78%, from 2.53% a year before. This can make a huge difference to income.
Barclays also has a large investment business, Barclays International. This part of the business drives most of the group’s income while providing diversification away from traditional lending.
The recent market volatility has favoured the investment banking segment. Trading income is up 33% to £6.5bn so far this year. And further uncertainty could provide more opportunities to profit.
Should I buy Barclays stock?
I already own shares in Barclays, but with the stock trading at a discount right now, I’m buying more. I’d like to think this year’s mistakes won’t be repeated, and there are some serious tailwinds for banks right now.
The 3.6% dividend yield isn’t much to write home about. But it’s broadly in line with the index average, so I can’t complain too much. If underlying performance improves, the dividend could be lifted.
