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Barclays shares: is it time to buy?

Barclays (LSE: BARC) shares have dived over the past month. Shares in the bank are down around 44% since the beginning of the year.

After these declines, the Barclays share price is now back where it was in the dark days of the financial crisis.

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The big question is, does this mean investors should rush to buy the stock?

Time to buy Barclays shares?

Barclays shares might look cheap compared to history. But it’s the company’s fundamental value that’s more important. The share price is only a number and is not a guide to the health of the business.

So, what are Barclays’ underlying fundamentals like? Well, the business is much stronger today than it was in 2009. The bank has spent the past decade shedding non-core assets and building its cash reserves.

Barclays’ fully loaded common equity Tier 1 ratio, a measure of its highest-quality capital, was 13.8% at the end of 2019. That’s above management’s minimum of 13.5%. At the end of 2008, the ratio was just 5.6%.

In other words, Barclays’ balance sheet is solid.

Its capital ratio isn’t the only factor depressing the Barclays share price.

Low interest rates are also weighing on the group’s profitability. The Bank of England’s decision to slash rates to a record will have a significant impact on earnings going forward because Barclays’ profitably is determined by its net interest margin. Put simply this is the gap between the rate the bank can pay to depositors and charge borrowers. 

Then there’s the potential fallout from the shutdown of the UK economy. Even though the government is doing everything it can to help businesses, lenders and borrowers, there will be some casualties. Barclays may have to take losses on some loans as a result.

Looks cheap

Still, despite all of the above, Barclays shares look cheap to me.

The stock is trading at a price-to-book (P/B) ratio of just 0.3. That implies that if the bank were broken up and sold, it would be worth 200% more than its current market value.

This implies that the stock offers a wide margin of safety at current levels. Indeed, while the lender might see a decline in profits due to the current situation, it is unlikely to collapse.

Policymakers both here in the UK and US have done everything possible to minimise the risk of a bank failure, and it looks as if they’re prepared to go a lot further if needs be.

As such, now could be a good time for risk-tolerant investors to buy Barclays shares. It might be some time before the UK economy opens up again, but when it does, and confidence returns, the stock’s current valuation suggests the shares could double or even triple from current levels.

With the risk of bankruptcy low, that implies the Barclays share price offers an attractive risk/reward ratio right now.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Barclays. 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.