It has been a tough start to the year for Barclays (LSE:BARC) CEO James “Jes” Staley. Forced to publicly discuss unfortunate links with convicted sex offender Jeffrey Epstein, the Barclays share price has also crashed. However, I think the share price will rebound in the long term if the company is successful in the following areas.
Whilst the Barclays share price is now at levels not seen since 2009, the bank is much better capitalised than it was in 2009. In order to assess this, I look at its Common Equity Tier 1 Ratio (CET1). This roughly translates to the amount of capital it has to absorb potential losses from its risk-weighted assets. It now stands at 13.8%, compared with just 5.6% in 2008. This will help Barclays cover £1bn worth of bad loans expected from the crisis. Combined with the UK government’s furlough scheme and pulling its latest dividend, I believe this should enable the bank to survive.
It is also worth noting that unlike the 2008 crisis, this is not a banking crisis. With Staley and other senior management waiving pay increases, I don’t think banks will re-emerge as public enemy number one. Therefore, a potential legacy of fines and drop in demand for its products should be avoided.
The consumer bank primarily drives group income, accounting for 47% in 2019 (£10.2bn). A much-publicised threat in this industry comes from challenger banks, such as Monzo and Metro Bank. However, increasingly, Barclays and the other big consumer banks appear to be winning this fight. Indeed, the top six banks now hold 87% of personal accounts, up from 80% in 2000.
I think there’s two key reasons why.
- Regulation: consumer banking is a highly regulated industry that favours the big players who can afford to comply with these regulations.
- Digitalisation: technologically the big players are catching up with the challenger banks. Barclays has made becoming more digital one of its four strategic pillars, with the number of digitally active customers up by 6%.
This should ensure Barclays at least retains its market share.
35% of the group’s income, investment banking is also crucial to long-term success. Again, in an industry where brand name and relationships are key, I do not see Barclays’ market share deteriorating. In fact, since 2017 Barclays has achieved nine times the market share gain of the next best European bank. This has elevated it to the sixth largest by fee income globally.
As alluded to above, Barclays’ group 2019 results were very strong, beating analysts’ estimates. Earnings were up 9% versus 2018 thanks to higher revenues and lower operating costs. Therefore, I believe that whilst the Barclays share price has dropped due to Covid-19 and speculation surrounding the CEO, the business is still fundamentally sound and, at a price-to-earnings ratio of just 6.4, a bargain buy.
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Charlie Watson has no position in any of the shares 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.