Yesterday (17 December) I wrote that Lloyds shares were cheap as chips. So how would I describe the Barclays (LSE: BARC) share price?
While Lloyds trades at 6.51 times earnings, Barclays has an even lower P/E ratio of 4.87 times. That makes it cheap as a bag of scraps, I guess, and I loved them as a kid. So should I tuck into Barclays?
I’m a big fan of investing in out-of-favour FTSE 100 stocks in the hope of grabbing a lower valuation, higher yield and bags of comeback potential. Barclays’ price-to-book ratio is just 0.3 against 0.6 at Lloyds. However, the yield is lower than I anticipated, at 4.94%.
Cheap but not that cheerful
Its share price jumped 4.64% last week, boosted by hopes that interest rates have peaked and will fall in 2024. Big banks are plugged into the economy and Barclays should benefit as stock markets revive, business confidence returns, deal-making picks up, borrower defaults drop and house prices hold firm.
Yet lower interest rates will hit net interest margins, the difference between what banks pay savers and charge borrowers. It’s already suffering on that score. In October, Barclays downgraded full-year margins from a 3.15%-3.2% range to one of 3.05%-3.1%. The stock duly fell 7%, even though Q3 profits beat forecasts to rise £1.89bn.
Both Barclays and Lloyds have regularly posted healthy profits but that hasn’t been enough for investors, and their shares have been in the doldrums for years. The Barclays share price is down 5.52% over one year and 7.79% over five.
Both made it through this year’s banking crisis relatively unscathed, although Barclays was more volatile because it retains an active US investment banking arm. Profits have fallen at the division, which hasn’t helped.
What stops me buying now
2024 could be bumpy. The US is on the brink of recession, and there’s a chance the UK economy could shrink too. House prices could slide further before they stabilise. After spending most of 2023 waiting for interest rates to peak, investors face another wait for the first cut to arrive in 2024. We may all have to stay patient.
Worryingly, two-thirds of the impact of rising interest rates has yet to feed through to borrowers, so loan defaults could rise in the New Year. On the plus side, UK wages are rising, unemployment is low, and consumer confidence is picking up.
Much now rests on CEO CS Venkatakrishna’s strategic overhaul. He’s said to be targeting £1bn of cost savings by cutting 2,000 jobs and 2,500 unprofitable investment bank clients, including sovereign wealth funds, governments and large institutional investors.
The good news is that Barclays is forecast to yield 5.88% in full-year 2023 and a beefy 6.74% in 2024, which will smooth over some of the uncertainty. The only thing stopping me from buying today is that I already have a big stake in Lloyds. This is giving me exposure to the banking sector recovery with slightly less risk. Otherwise I’d pile into Barclays but with a long-term view. At some point, I think its shares will outpace the FTSE 100. They have a lot of catching up to do, but I don’t know if they’ll surge next year.
