Lloyds Banking Group has been hit the hardest by the PPI scandal with its final compensation bill set to come in north of £20bn, but Barclays (LSE: BARC) has faced its share of the pain too.
This week the two revealed big claims spikes ahead of the 29 August deadline. While Lloyds puts the last-minute surge at an extra £1.2bn to £1.8bn, Barclays reports an additional bill of £1.2bn to £1.6bn.
Barclays’ total now looks like it could be as high as £10.8bn. And estimates suggest the total PPI bill for the whole banking sector could come to well over £50bn. But at least the claims are no longer adding up, and the uncertainty that’s been dogging the sector is finally reaching its conclusion.
Barclays shares have picked up a little, coincident with the passing of the PPI deadline, gaining 10% since market close on 28 August. So are we really past the bottom now, and was that the lowest Barclays shares are going to go?
Before we get over-confident, we’ve been here before. Back in July 2016 in the aftermath of the Brexit referendum, the Barclays price plunged to levels not seen since the banking crisis. In the couple of years following, the shares recovered gradually and many of us thought Barclays was finally past its worst.
But the low reached on 28 August was even lower than that 2016 bottom. Only slightly, but it reinforces the fact that we should never assume things can’t get worse.
Brexit is obviously still the big threat, and could that possibly drive Barclays shares down to even more painful lows? The possible economic effects of a no-deal departure are impossible to quantify, but things would not be nice, so the answer has to be a yes.
And even then, Brexit might not be the biggest threat. Fellow Motley Fool writer Harvey Jones has been taking at look at the damage that even lower, and perhaps even negative, interest rates could have on the UK’s banks. He points out that German banks are thought to lose €2.4bn a year as a result of the eurozone’s negative interest rates, amid fears they might be lowered even further.
While I really don’t want us to crash out when Brexit happens, I’m at least grateful that we didn’t make the colossal mistake of joining the euro — our banks would surely be in a considerably weaker state today if we didn’t have control of our own interest rates.
So what would I do?
After all this gloom, what would I actually do about the Barclays share price? Despite the possibility of even further falls over the shorter term, I’m actually still bullish on the banking sector for the long term. Barclays is still one of the most profitable banks in Europe, with net earnings of £1bn in the second quarter. And the shares are trading well below net asset value too.
I’m unlikely to buy any Barclays shares as I already own some Lloyds. But if I didn’t, I’d be seeing a P/E of 6.6 as providing a reasonable safety margin, and I’d see dividends of better than 6% as enough to keep me going through the next couple of years.
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Alan Oscroft owns shares of Lloyds Banking Group. 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.