Should Barclays plc be dealing around 20% lower?

Banking giants like Barclays (LSE: BARC) have seen their share price take a pasting since Britain voted to leave the European Union. A 20% slide since Brexit materialised means Barclays’ stock has conceded 32% of its value in the year-to-date, the bank visiting levels not seen since the depths of the 2008/2009 financial crisis in the process.

Despite this weakness however, I believe the bank could still be considered too expensive at current levels.

Conventionally expensive

Thanks to a predicted 26% earnings slide in 2016, to 12.3p per share, Barclays currently deals on a P/E rating of 12.1 times. On paper this is far from shocking — indeed, this falls well below the FTSE 100 historical average rooted around 15 times.

However, Barclays’ multiple falls outside the benchmark of 10 times indicative of stocks with high risk profiles. A rerating towards this level would leave the financial giant dealing at 123p per share, marking a meaty 18% discount from current levels.  

And Barclays doesn’t have a punchy-enough dividend to mitigate this disconnect either.

Thanks to the pressures of escalating misconduct costs on the balance sheet, Barclays has pledged to pay dividends of 3p per share through to the end of 2017, down from the 6.5p rewards of recent years. So Barclays carries a 2% yield through to the close of next year. By comparison the FTSE 100’s historical average stands at 3.5%.

Problems aplenty

And I reckon there’s plenty of room for Barclays’ share price to keep retreating. Sure, the company’s broad US exposure provides it with some protection from its core British operations — the domestic economy is widely tipped to enter recession in the months ahead.

However, Barclays is particularly susceptible to the impact of a collapsing pound. The currency slumped to its cheapest against the US dollar since 1985 back last week, around $1.29. And sterling is expected to keep falling as the economy cools and the Bank of England looks likely to cut rates to prevent a financial catastrophe.

Indeed, Monetary Policy Committee chief economist Andy Haldane has commented that “a package of mutually-complementary monetary policy easing measures is likely to be necessary” to support the economy.

This of course adds further pressure to Barclays, the bank already toiling in an environment of ultra-low interest rates.

Meanwhile, Barclays’ investment banking operations are likely to keep struggling as trader appetite falls even further through the floor.

The Corporate and Investment Bank endured a 31% pre-tax profit slide during January-March, and I wouldn’t expect revenues to bounce back any time soon as painful Brexit negotiations will probably last months, if not years.

And the aforementioned misconduct issue is likely to drag on Barclays’ performance too. Indeed, I fully expect PPI-related costs in particular to surge ahead of a possible 2018 claims deadline, another likely scenario that could push share prices firmly to the downside.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.