Is Barclays a buy for my ISA after the 50% plunge?

In a recent article I wrote about three FTSE 100 banks that the UK’s government and the Bank of England would most likely bail out if matters get worse. The analysis of these three banks was rather brief.

However, even when I wrote about them at the time, I managed to fall in love with Barclays (LSE:BARC). I began thinking of stockpiling it in my Stocks and Shares ISA. So, I decided to write this article both to find out if my idea was good and to share my thoughts with you.

What is Barclays famous for?

First of all, Barclays is renowned for its diversification. It has branches all over the world and does not rely solely on the UK’s economy. It used to mainly specialise in providing banking services to individuals and small businesses. But some years ago it developed a strong investment banking unit. The bulk of its profit c0me from trading and the selling of bonds.

According to management, the main threat for Barclays’ revenue, and therefore income, is the low interest rate environment all over the world.

Barclays investment thesis

There are good chances that this will not last forever. When the coronavirus panic eases and and Brexit uncertainty is cleared away, the Bank of England will most likely increase interest rates.

The banking sector has changed dramatically since the 2008 financial crisis. Banks are now required to hold more liquidity than they had done in the past. Moreover, the leverage requirements have changed as well. This makes investing into banks less risky than it used to be.

Accounting fundamentals

I have analysed Barclays’ financial results. The bank’s revenue was steady between 2016 and 2019, but profit increased in 2019 compared to 2018. This is because the bank started reducing its operating costs. As part of the cost-saving initiative, it closed many physical branches and offered its customers an option to access many services online.

We can also see that the so-called value multipliers – price-to-book (P/B) and price-to-earnings (P/E) – are at record lows. This means that the bank is now much better value as an investment.

The CET1 ratio has been constantly rising between years 2016 and 2019. The greater it is, the less risky the bank. Most investors require a ratio of 12%. We can see that Barclays’ current CET1 is well above that threshold.

What I also like is the dividend yield, which is currently 10%. It also seems to be sustainable, as it is well covered by earnings.

Earnings history and accounting multipliers

*Net profit attributable to the shareholders

**The recent share price of 89 pence was divided by the EPS of 14.3 pence.

Now what?

Given the current macroeconomic risks, investors’ panic, their unwillingness to trade, and low interest rates, Barclays’ revenue and earnings might decrease. Moreover, it seems that buying the dip now feels like trying to catch a falling knife, which is both hard and dangerous. Nevertheless, Barclays’ shares are a sound long-term investment in my opinion.