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Will bad debt hurt the Barclays share price this year?

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It’s been a big week for earnings. Oil and banking majors in particular have been making headlines. At the banks, the story seems the same – massive provisions for bad loans being made in anticipation of coming defaults. Even with this however, the Barclays (LSE: BARC) share price has been holding up well.

Quarterly results

One reason for the robust Barclays share price is that not all of the news was bad. For Q1, it said this week that credit impairment jumped five-fold to £2.1bn, reducing profit by 42% to £605m. Worse than forecast, but still a decent profit all things considered.

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It was helped by a 20% increase in group revenue to £6.3bn, itself brought about from the trading arm of the branch. Barclays’ investment bank saw a 77% increase in income as volatile trading made for high volumes. This is the best performance for the trading side since 2014.

It is also worth noting, of course, that the loan provisions are just that – provisions. They are preparation for the potential of loan defaults, not actual defaults themselves. Reporting standards aside, at the moment these are not realised losses. The question for those interested in the Barclays share price is, will they become real?

The Barclays share price in 2020

The overriding issue for the Barclays share price is how badly the lockdown and the coronavirus will impact its customers. There is a lot of potential for it to be very bad. Numerous small businesses will likely not survive. Individuals will lose jobs, and if the downturn sparks a recession, the domino effect will make things even worse.

The company’s CEO Jes Staley warned: “This is unprecedented territory that we are in”. He should know, he worked in JPMorgan’s operating committee during the 2008 financial crisis.

Barclays is also particularly exposed to credit card debt – its Barclaycard division accounting for more than 40% of the bad loan provisions. This is something of an unknown quantity at the moment. While government measures are in place to help prevent individuals hitting financial rock bottom, they may not be enough for many to cover their debt.

For investors, the end of lockdown may be the perfect storm for the Barclays share price. Suspended dividends are unlikely to be reintroduced immediately. The extra revenue gains from high volume trading will fade as the market calms down. At the same time, the true extent of lockdown and failing businesses will start to be felt.

Don’t get me wrong, I am not saying things will definitely go badly, but I think they certainly could. This is the unknown quantity for me that makes investing in banks a little too risky right now.

It is perfectly possible that the Barclays share price is a bargain right now, and in six months’ time we might see it back up above 150p. However I can also see potential for a very bad year to come. If the Barclays share price goes the way it did during the 2008 financial crisis, it has room to halve yet.

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Karl 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.

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