I used to view the FTSE 100 banks as attractive UK shares. They weren’t the most exciting stocks out there but the likes of Barclays (LSE: BARC) could be relied upon to deliver reliably decent shareholder returns.
During the five years since the Brexit referendum, however, my stance on these stocks has changed considerably. The threats of prolonged weak economic growth in the UK, and the possible need for the Bank of England to keep interest rates at rock-bottom levels, cast a huge shadow over the profits outlook for Barclays and its peers. The outbreak of Covid-19 last year has added considerable risks for Britain’s banking giants since then.
A UK share facing intensifying competition
The impact of broader macroeconomic factors on Barclays’ bottom line isn’t the only thing that makes me nervous, however. The rapid growth of challenger banks like Monzo and Starling is also muddying the outlook of established UK banking shares. Soaring demand for digital banking has seen Revolut rack up as astonishing 12m customers already, for example. It only set up shop in 2015.
News this week indicates that the landscape is about to get a lot more competitive. US industry colossus JP Morgan has announced plans to launch its own digital-only retail bank in the coming months. The service will offer a slew of products from current accounts to credit cards and mortgages.
On the plus side…
That said, there are reasons why Barclays could perform much more strongly than its retail-focused FTSE 100 rivals Lloyds and NatWest. It has investment banking operations, for a start, which have performed resolutely in 2020 thanks to intense volatility on financial markets.
Income at its Corporate and Investment Bank rose 4% to a shade under £8bn between January and September, latest financials showed. Trading here could remain strong over the next few years too, and especially during the new bull market that should accompany the inevitable economic recovery.
Barclays’ foreign exposure
On top of this, Barclays has significant exposure to foreign climes to help support profits growth. This should give it respite from the long-term economic impact of Brexit, not to mention the Covid-19 crisis that has been particularly devastating for the UK economy. The business has significant US exposure, which should let it reap the fruits of huge government and central bank stimulus measures there.
City analysts reckon Barclays’s full-year earnings will rocket 73% in 2021. They predict that it will start paying dividends again too, resulting in a market-beating 3.7% dividend yield.
But I won’t be investing in Barclays any time soon. Not even its cheap price-to-earnings (P/E) ratio of 11 times is enough to tempt me. The risks of these bright earnings forecasts being blown off course are too great in my opinion. I’d much rather buy other cheap UK shares for my Stocks and Shares ISA today.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. 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.