Big banks have been among the biggest losers in this year’s stock market crash. The Barclays (LSE: BARC) share price has fallen by 50% so far this year, compared to a fall of around 25% for the FTSE 100.
This drop has left Barclays shares trading at a 65% discount to its December net asset value of 262p. Although I expect bad debts to rise after the coronavirus pandemic, I think it’s possible that the shares are now too cheap to ignore.
Should we be buying Barclays shares? I’ve been taking a closer look at the numbers to find out more.
Did Barclays really need to cut its dividend?
Last year’s results from Barclays were pretty encouraging, in my view. Underlying pre-tax profit rose by 9% to £6.2bn, while the group’s return on tangible equity improved from 8.5% to 9%.
The bank’s balance sheet looked good to me, too. Barclays’ common equity tier 1 (CET1) ratio rose from 13.2% to 13.8% – well above the minimum required by the regulator. Lending levels remained fairly cautious, with loans accounting for just 82% of deposits.
If 2020 had been a normal year, I’d have expected the Barclays share price to make good progress. Unfortunately, 2020 won’t be normal. And because this is the first serious crisis since the 2008 crash, everyone is nervous.
I think this is why none of the banks really complained about being forced to cancel their dividends by the regulator. They know they’re on probation. And they know that they must cope with the aftermath of the pandemic without being seen to profit from government rescue money.
However, if the banks come through this situation successfully, I think investors might finally start to trust them again. If I’m right, I think the Barclays share price could re-rate to a level that’s much closer to its book value.
Can the bank handle bigger losses?
As a value investor, I’ve been tempted by Barclays shares for a long time. To get an idea of how risky the stock could be in a recession, I’ve been looking at the bank’s ability to absorb losses.
At the end of 2019, the bank had £345bn of loans and advances to customers. Against this total, the bank has already set aside £6.3bn for expected losses. That’s gives an impairment rate of about 1.8%.
How much worse will this figure get? I don’t know. But if Barclays found that 5% of its loans were not going to be repaid, impairments would rise to £17.3bn. I estimate that this would reduce the group’s net asset value to around 195p per share.
At the time of writing, the Barclays share price is just 90p. The market appears to be pricing in much bigger losses.
What’s next for the Barclays share price?
Barclays has been in business since 1736. I don’t think coronavirus is going to wipe the bank out. However, ultra-low interest rates and higher loan losses could make life difficult for the next couple of years.
In my view, the Barclays share price reflects this reality. Although the stock isn’t without risk, I suspect that the bank’s share price will be a lot higher in five years. I’d view 150p as a reasonable target.
