The Barclays (LSE: BARC) share price has been falling over the past few months. Since the stock hit a 52-week high of nearly 190p at the end of March, it’s slumped to 165p. Still, despite this recent performance, shares in the banking giant are up nearly 41% for the past 12 months as a whole, excluding dividends.
However, while shares in the lender have been sliding, its fundamentals have been improving. According to Barclays’ latest results release, net profit hit £1.7bn in the first quarter of the year. The results benefitted from a significant decline in loan loss charges. These totalled £55m in the first three months of 2021, compared to £2.1bn in the first quarter of 2020.
So why has the Barclays share price been falling as its income improves?
It’s unlikely there’ll be one primary reason why the stock has performed so badly over the past three months. But it seems to me as if falling interest rates are one factor that’s to blame.
Lenders like Barclays make money by borrowing funds from depositors, or other banks, and then lend them out. It makes money on the spread of interest rates it pays to creditors and receives from lenders.
Last year, central banks worldwide slashed interest rates to help companies and consumers navigate the coronavirus crisis. These cuts decimated banks’ interest rate spread.
However, earlier this year, interest rates on government bonds started to rise. As the rates banks charge to customers are often linked to these bonds, this was a positive development for lenders such as Barclays.
Unfortunately, bond interest rates have since fallen back once again, doing damage to Barclays’ profit margins. This could be one reason why shares in the lender have fallen over the past few months, despite its improving fundamental performance.
Barclays share price outlook
Despite the interest rate environment, I think the outlook for the stock’s improving. The bank’s primary business is lending money and, generally speaking, demand for loans increases when the economy is growing. Rising consumer confidence could also lead to more lending.
At the same time, it seems as if the bank’s losses from the coronavirus crisis won’t be as significant as initially expected. This may leave the group with more capital than it needs, which could be used for shareholder returns.
So, overall, while the Barclays share price may remain under pressure if interest rates keep falling, I think the bank’s outlook is exciting. The economic recovery should push borrowing demand higher, allowing Barclays to lend more and offset lower profit margins with more volume. There could also be the potential for higher shareholder returns as profits continue to recover.
Based on these reasons, I’d ignore the recent Barclays share price trading performance and buy the stock for my portfolio today.
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Rupert Hargreaves 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.