I lost a modest chunk of money on Barclays (LSE: BARC) in the banking crunch, but it did switch me on to a recovery strategy that I think we should all be watching out for when a whole sector is facing a crisis. I resolved to buy bank shares again when I thought they were selling too cheaply.
In my case I went for Lloyds Banking Group, whose shares still haven’t really gone anywhere despite the banks’ much stronger outlook these days, but I’m in it for the long term and I still think the strategy is sound. So what was I seeking in a bank, and what do I think you should be looking for if you’re considering Barclays?
Liquidity must come first, as that was the thing that almost killed the whole sector — a number of major banks were effectively insolvent and would have collapsed without massive injections of cash. At the interim stage, Barclays recorded a CET1 capital ratio of 13%, which it said was partly “driven by strong organic earnings growth.“
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Stress
While that number alone might not mean too much to you, it’s easily within the Bank of England’s requirements, and Barclays (along with the other big UK banks) comfortably passed the BoE’s stress tests in 2017. While that doesn’t mean we’re safe from a future financial crash, it does show that Barclays is in a far stronger position now.
Liquidity is not much use without profits, and on that front it looks like Barclays is seriously on the mend too. The past few years of continuing big EPS falls have dented confidence, mind, and I think many investors will be waiting to see if forecasts for a big recovery in earnings this year will come to pass — and that will surely be holding the share price back.
But if predictions prove accurate, we’ll be looking at a share on P/E multiples of only around eight or nine over the next two years — and that’s surely cheap, isn’t it? Oh, and dividend yields are forecast to reach 3.5% this year and 4.3% next.
The bears
While Barclays’ liquidity and potential profit recovery might look good, you need to check out the bearish viewpoint too — and one big drag on Barclays is the ongoing PPI mis-selling scandal.
As my colleague Royston Wild points out, Barclays’ total provisions for payment of PPI compensation amounted to a whopping £9.6bn by June, after an additional £400m had to be set aside during the first half of the year. To put that into perspective, it’s more than two-and-a-half times 2017’s full-year pre-tax profit.
The deadline for PPI claims of August next year does bring some respite, and Barclays says it’s confident of its provisions. But over the past couple of years, hardly a quarter has gone by without one of the big banks revealing another extra chunk of cash having to be set aside for PPI. Do you reckon any of them will have over-estimated it and have lots of set-aside cash left over come next August? No, me neither.
The bottom line for me is that I think the positives significantly outweigh the negatives at Barclays, though I can see PPI and Brexit continuing to drag on the share price for some time yet.
