Barclays (LSE:BARC) has been one of the FTSE 100‘s best performing stocks in 2024. Boosted by hopes of interest rate cuts, the banking giant has seen its share price soar 50% in the year to date.
Investors may be temped to think that its famously-low valuation has soared as a result. But a quick glance at broker forecasts shows that the opposite’s true.
Cheap on paper
At 229.4p per share, Barclays’ share price trades on a forward price-to-earnings (P/E) ratio of 7.3 times. This makes it cheaper than high street rivals Lloyds (9.2 times) and NatWest (8.1 times).
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On top of this, the bank trades on a forward price-to-earnings growth (PEG) ratio of 0.6. Any reading below 1 suggests that a company is undervalued.
Growth forecasts are based on predictions that earnings will soar 13% year on year in 2024. Analysts think lower rates will boost bottom lines across the banking industry. And they believe Barclays’ profits will receive an extra boost from its ongoing successful cost-cutting drive.
2 reasons to avoid Barclays
That being said, I still have reservations about Barclays’ growth trajectory, and so continue to avoid the bank despite the cheapness of its shares.
It’s my opinion that its low valuation reflects the high risks it still poses to investors. Here are just two reasons I’m not tempted to invest.
Interest rate questions
High interest rates have advantages and disadvantages for banks. They boost the difference between the interest they charge borrowers and offer savings which, in turn, gives their net interest margins (NIMs) a shot in the arm.
However, elevated interest rates can also substantially sap loan growth and push credit impairments higher. At Barclays, loans and advances slipped 1% year on year in the first quarter of 2024. Bad loans remained broadly stable, but were still significant at around half a billion pounds.
The problem for banks is that interest rates may remain higher for longer than the market has priced in however. The IMF, for instance, has just warned that “further challenges to disinflation in advanced economies could force central banks… to keep borrowing costs higher for even longer“.
Businesses struggle
The prospect of higher-for-longer rates is especially concerning given the mounting pressures on small businesses. Barclays’ rising impairments have been driven chiefly by US card customers in recent times. The danger is that the number of bad loans could be about to soar elsewhere too.
This is because the bank’s the UK’s biggest provider of small-and-medium enterprise (SME) loans. With the economy struggling, the pressure on these companies is especially severe.
Insolvency specialist Begbies Traynor says the number of British firms in ‘significant’ financial distress leapt 8.5% in the second quarter. Meanwhile, the number in ‘critical’ financial distress rose 1.1%. Smaller companies are especially vulnerable in the current climate.
The verdict
The FTSE 100 remains packed with great value stocks following years of underperformance. But those risks above — combined with the longer-term threat of rising competition — make Barclays a cheap stock I’m keen to avoid.
