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Thinking of buying the Barclays share price? You need to read this first

On paper Barclays (LSE: BARC) looks like a steal.

Sure, it faces an uncertain outlook as the threat of a no-deal Brexit withdrawal grows (well, some of the time) and the prospect of troubled trade negotiations with the European Union (among others) intensifies. But more upbeat investors could argue that a rock-bottom forward P/E ratio of 7 times factors in the possibility of some earnings trouble emanating from the tough political and economic environment.

This isn’t a school of thought which I share, however. Barclays has long traded on an earnings multiple well below the bargain-basement benchmark of 10 times or below, though this hasn’t stopped its share price plummeting in recent years (and by 17% in the past year alone). And more heavy weakness can be expected should, as some expect, the UK fall off the Brexit cliff-edge and enter a painful recession, exacerbating the bank’s existing trading troubles (income dropped 1% in the first six months of 2019).

PPI pains

As if things weren’t bad enough, Barclays is still being battered by the costly PPI mis-selling saga too. The August 29 deadline might have come and gone, but the business, like Lloyds, is likely to see the bills keep on mounting.

The colossal scale of the problem was illustrated again yesterday, Barclays announcing that it’ll be forced to make provisions of between £1.2bn and £1.6bn for the third quarter. The bank has, like its FTSE 100 rival, said it’s been taken aback by “a significantly higher than expected volume of PPI-related claims, enquiries and information requests during August,” and in particular during the final few days before the deadline.

These fresh provisions mean that Barclays’ total bill could shoot through the £11bn marker, but don’t rule out the need for more cash being set aside in the coming quarters. Indeed, the bank warned that “the final outcome could be above or below the estimated range” and dependent upon “a number of factors including the quality of recently submitted claims.”

Dividends in danger?

Barclays has long underestimated the financial impact of PPI and, as we can see from this week’s update, nothing much appears to have changed on that front. And this should come as a worry to shareholders expecting more generous dividend increases given the bank’s guidance that, following these extra provisions, it expects to be at its target CET1 ratio of 13% at the end of the year.

Clearly, any further mistakes in assessing could see it fall short of its capital target for this year and/or next, adding to the strain that those aforementioned struggles facing the UK economy are applying to the balance sheet. And this could cause its progressive dividend policy to grind to a halt. So forget about City predictions of 8.8p and 9.5p per share dividends in 2019 and 2020 and their subsequent yields of 6% and 6.4%. Barclays simply carries too much risk right now, in my opinion.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.