The Barclays (LSE: BARC) share price has risen about 45% in the past year. It has outperformed the FTSE 100 index, which rose 10% in the same period. It also beat Lloyds Bank‘s return of 35%.
The share performance has been encouraging. However, there is no guarantee that the past performance will continue. Should I consider buying the stock for my portfolio?
Barclays’ fundamentals
Barclays reported a 6% drop in total income in its first-quarter results. In my opinion, the results are not bad considering the Covid-19 disruptions. Barclays’ international income was down 5% at £4.4bn, and its UK income was down 8% at £1.6bn. The reopening of the sectors and improved macro environment should help the bank to return to growth.
The macro-environment has changed a lot since I last reviewed the stock. The successful vaccination drive and the national lockdown have reduced Covid-19 cases drastically in the UK. Also, in my opinion, the Brexit disruptions have been less than initially feared. According to the recent Halifax house price index for May, the typical UK home is worth approximately £262,000, a growth of 9.5% year on year. All these factors are a big positive for Barclays’ share price.
Pre-tax profits jumped to £2.4bn from £0.9bn for the same period last year. This was mainly due to lower impairment charges due to the improved economic outlook. The return on tangible equity (RoTE) also improved to 14.7%. It has a stable balance sheet. The CET1 (common equity tier 1) ratio came at 14.6%, above the management’s medium-term target of 13%-14%. The ratios are also above the regulatory requirement.
Risks to consider
The cost-income ratio increased to 61% from 52% during the same period last year. The cost-income ratio is an important financial metric when analysing banking stocks; it is derived by dividing the operating costs by the operating income. Operating expenses rose due to higher variable compensation accruals and also due to Covid-19 costs. Management expects operating costs to be higher this year. I believe this was the prime reason for the sell-off in Barclays’ shares on the day the results were announced.
In its outlook, the management sounds cautious due to the uncertainty caused by the Covid-19 pandemic. Also, in my opinion, there could be one-off real estate costs as the bank is reviewing its real estate. It is closing a lot of physical branches. This is good in the long-term due to lower operating costs. However, it should ensure that the branch closures do not disrupt the business. The bank is also facing competition from new fintech companies that are more technologically advanced.
Conclusion
I conclude that the bank is fundamentally strong. It is geographically diversified as income from international business makes around 73% of total income. Also, the bank has less reliance on net interest income, which is good in the current environment. In my opinion, interest rates will be low for a considerable time to stimulate growth. I would consider buying Barclays shares in the coming months.
