Thanks to the economic ravages of Covid-19, this is not a great time to be a major UK lender, such as Barclays (LSE: BARC). As thousands of businesses go under and hundreds of thousands of people lose their jobs, loan defaults and losses are surging. This is all bad news for Barclays shares.
Barclays bashed by bad debts
As one of our ‘Big Four’ retail banks, Barclays is heavily exposed to personal and corporate lending trends. For now, all those trends are steeply negative for Barclays shares. Earlier today, Barclays released its half-year report, which made for grim reading.
For example, the FTSE 100 bank set aside another £1.6bn in credit impairment charges in the second quarter. These extra reserves offset Barclays’ most recent round of loan defaults and losses. Even so, its bosses expect loan-impairment charges to fall in the second half of 2020.
Barclays’ trading operations are a bright spot
Furthermore, this environment of near-zero or negative interest rates is squeezing the bank’s net interest margin (NIM, the rate spread it makes from lending), as well as Barclays shares. Worsening results from credit-card and overdraft lending pushed Barclays UK’s income down by 11% in H1 2020.
Then again, the half-year results would have looked much worse, but for surging income from its investment-banking arm during the recent market meltdown. Income from corporate and investment banking leapt by a third year on year.
For the record, first-half pre-tax profit crashed 58% from £3.01bn in 2019 to £1.27bn this year. Likewise, Barclays’ earnings per share plunged two-thirds (67%) from 12.1p to 4p. For 2019, the bank paid out an interim dividend of 3p, but has suspended dividends until further notice – another negative for the shares.
…hit Barclays shares
Given these results, it’s no wonder that the shares are slumping. Right now, they trade at 106.2p, down 5.1% since yesterday’s close. What’s more, they have crashed more than a third (34%) over the past year.
Over the past 12 months, Barclays shares have traded as high as 193p (on 16 December 2019) and as low as 73p (on 19 March). Outside of this year, they haven’t plumbed these depths since the worst days of 2008/09, when they crashed below 50p.
I see deep value in Barclays shares
For me, the shares were clearly a standout bargain at 73p, but do they still offer value today? Right now, Barclays is valued at £19.4bn, making it a big player in the FTSE 100. With 2020 earnings decimated by the coronavirus, and dividends and share buybacks suspended, I think Barclays shares are impossible to value using conventional metrics.
That said, I see one hidden strength and one value indicator flashing. The hidden strength is Barclays’ balance sheet. Today, CEO Jes Staley claimed the bank, “has never had a stronger capital base.” For the record, its capital ratio has climbed to 14.2%, up from 13.1% at end-March, boosted by halting dividends.
The value indicator is that Barclays is valued at a very low proportion of its net tangible asset value (NTAV). A current NTAV of 284p means that the shares trade at just 0.37 times their underlying asset value. Even taking Covid-19 into account, this is crazily low, which is why I’d buy and hold Barclays shares today.
Cliffdarcy 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.