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Why the Barclays share is my FTSE 100 banking pick 

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The past year had its share of ups and downs, especially for banks. But some FTSE 100 banks have recovered faster than others. Barclays (LSE: BARC) is one of the better recoverers. The Barclays share price is well past the pre-market crash levels, and is now at levels last seen in 2019.

By comparison, it’s FTSE 100 peer Lloyds Bank is struggling to get back to early 2020 levels. So are other banks, like Natwest and Standard Chartered, for that matter.

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Why it is ahead

And this is despite the fact that Lloyds offers a higher dividend yield than Barclays. One reason why this has not made a difference to investors is that despite the difference in yields, the numbers are still quite low for Lloyds Bank at 1.5%.

But there are other reasons too. Unlike Lloyds Bank, Barclays is diversified. It is not heavily dependent on either the retail banking consumer or the UK market. 

Consider this. In 2020, its total income grew by a minuscule 1%. This was because of a fall in interest income, while it fee-based income actually rose a fair bit. Its income from corporate and investment banking grew by a very healthy 22%. To put it another way, its income was relatively cushioned from the hit to income from loans. 

Also, only half of its revenues come from the UK, with 34% actually coming from the Americas. This means that even if the UK economy is more affected by coronavirus than others, which has in fact been the case, Barclays’ business is insulated to a great extent. 

Competitiveness and macros support the bank

So far, so good. The next question is – can the Barclays share sustain its upswing? 

I think it can. If I look at its price-to-earnings (P/E) ratio of 21 times, it compares favourably to other FTSE 100 stocks and even other banks. Lloyds Bank, for instance, has a P/E of more than 35 times at present. 

As the stock market rally continues, I reckon investors will circle back to stocks that look comparatively cheap. Barclays can feature on that list. 

From a macroeconomic perspective, I think the bank is in for better times as well. If the economy picks up pace, as is widely expected, banks’ fortunes would take a turn for the better. Higher interest rates are already speculated as inflation starts inching up. Loans are also likely to be higher in better times and bad debts could be smaller.  

Low dividends hold back Barclays share price

I think that its share price could be held back by caps to dividends, though. Even though the Bank of England’s Prudential Regulation Authority has allowed financial institutions to pay dividends, they are restricted based on banks’ financial strength and performance.

Barclays’ current dividend yield is at 0.5%, which is no way comparable to say, tobacco biggie Imperial Brands’ big dividend, which holds it in good stead despite its falling share price.  

These caps are expected to be temporary, however, so the Barclays bank upswing could continue well into this year, making it my banking pick. 

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, Imperial Brands, Lloyds Banking Group, and Standard Chartered. 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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