The Barclays (LSE:BARC) share price has been on fire recently. Over the last 12 months, it has more than doubled, increasing from 87p to around 185p today. In fact, this recent rise has pushed the share price beyond pre-pandemic levels. But can it keep climbing? And should I be adding the stock to my portfolio?
The rising BARC share price
Barclays works similarly to most banks. It uses customer deposits to provide loans to individuals or businesses and then generates profit from charging interest on these loans. Unfortunately, due to the pandemic causing lockdowns and massive disruption worldwide, many of its borrowers have been unable to keep up their payments. This appears to be a catalyst behind the 50% collapse of the BARC share price in March last year — apart from the wider fall that affected many shares whether it was deserved or not.
Looking at the recently published full-year 2020 results, the decline was somewhat justified. Overall profits fell by 38% to £1.53bn from £2.46bn a year before. And most of this is attributable to the aforementioned missing loan payments that resulted in a £4.8bn credit impairment charge. Needless to say, that’s not exactly positive news. So why has the BARC share price been rising?
Upon closer inspection of the individual divisions of the business, there are some promising signs of growth. In particular, its Corporate Investment Banking segment, which generates around 46% of revenue, grew its profits by a record 29%. Furthermore, its Consumer, Cards & Payments division was unprofitable during 2020 due to reduced consumer spending. However, with lockdown restrictions slowly being eased and businesses reopening their doors, many of the disruptions to Barclay’s revenue stream appear to be vanishing, I feel.
Risks to consider
Most profits are generated by the aforementioned Investment Banking division. But this ultimately exposes the firm to a considerable level of market risk. Making smart investment decisions is a challenging task that requires talented individuals to execute. Suppose the company is unable to retain its skilled teams of investment managers, or a series of poor decisions are made. In that case, the division’s future performance could suffer considerably, impacting both overall profits and the BARC share price.
Another risk to consider is interest rates. In 2020, the Bank of England cut rates to nearly 0% and added further pressure on profit margins for Barclays’ lending operations. This is something that’s ultimately out of the company’s control. And so far, there’s no clear indication of when interest rates will begin to rise again.
The bottom line
Personally, I’ve never been particularly fond of banking stocks, primarily due to the low-interest-rate environment they’ve had to operate in for the last decade.
However, I do have to admit that even after the recent surge in the BARC share price, it still looks like it can climb higher. Its P/E ratio is currently around 21. By comparison, its main competitors like Lloyds and HSBC are trading at P/E ratios of 36 and 31, respectively. To me, this indicates the bank is currently undervalued. And therefore, Barclays is a value investment I would consider making for my portfolio.
Zaven Boyrazian does not own shares in Barclays. 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.