Barclays (LSE: BARC) shares have slumped recently. Today, they can be picked up for around 133p versus a price of 155p a month ago.
Are they a bargain at this lower share price? Let’s discuss.
At first glance, Barclays shares do seem really cheap at current levels.
Assessing analysts’ earnings forecasts, the forward-looking price-to-earnings (P/E) ratio is about 4.5
Not only is that considerably lower than the FTSE 100 average, but it’s also quite a bit lower than the average UK bank stock.
Lloyds and HSBC, for example, currently sport P/E ratios of 5.5 and 5.9 respectively.
Additionally, Barclays’ price-to-book (P/B) ratio is super low too. Currently, it’s about 0.3.
These metrics suggest that Barclays shares are undervalued right now.
Cheap for a reason?
However, experienced investors know that cheap shares are often cheap for a reason.
So, what’s lurking under the surface here?
Well, one issue is uncertainty in relation to the US economy (Barclays has a lot of exposure to the US today).
The US economy is doing well at the moment.
But with interest rates looking set to stay higher for longer, there are worries that economic conditions could be set to deteriorate.
And a downturn in the economy could have a big impact on Barclays’ profitability.
It’s worth noting that for Q3, the group posted credit impairment charges of £433m – 14% higher than in Q3 2022.
Another issue is margin pressure.
Higher interest rates are typically good for banks.
However, right now, they’re presenting a bit of a challenge for many organisations because the banks are having to offer really high interest rates to compete with newer online banks.
In its Q3 results, Barclays said that its 2023 net interest margin in its UK retail bank is expected to come in at between 3.05% and 3.1% – below its previous guidance of around 3.15%.
Investment bank issues
A third issue is that Barclays’ investment bank has been struggling recently.
For Q3, it reported a 6% drop in income at its investment bank, following a similarly poor performance in its H1 results.
It seems a lack of volatility in the markets was a driver of the weakness here as this dampened clients’ enthusiasm for trading.
Now, as a result of the margin pressure and the investment bank woes, Barclays said that it would embark on some restructuring in the coming months.
However, the market didn’t like this.
Indeed, on the back of this news, analysts at BofA Global Research downgraded Barclays to an ‘underperform’ rating citing uncertainty over the impact of the bank’s restructuring in terms of shareholder returns.
“A potential material, but unspecified, restructuring charge to deliver unspecified benefits over an unspecified time period adds to uncertainty about Barclays strategy and financial target,” wrote the analysts
“This could improve longer-term profitability, but seems unlikely to address the core issue of c70% of capital tied up in the lower returning corporate and investment bank,” they added.
Better value stocks to buy?
All in all, there’s a range of issues that add risk to the investment case here.
Given the multitude of challenges Barclays is potentially facing, the risk/reward proposition looks a bit opaque.
In other words, the shares could be a ‘value trap’.
Given the uncertainty here, I won’t be buying them for my portfolio.
I think there are better value stocks to buy today.