If you’d invested in Barclays (LSE: BARC) at the start of 2020, you’d be 40% down now, as the banks have been battered by the Covid-19 crisis. The longer term is not much better, with the Barclays share price down 55% in five years. But I think the current short-term market view of the FTSE 100‘s banks is a mistake. I reckon the whole sector, and Barclays in particular, should look a lot better this time next year. Here are three reasons why I’d buy now.
Liquidity is as healthy than ever
The Barclays share price suggest the bank is struggling. But if it is, it’s not showing in the balance sheet. The Bank of England’s annual stress tests have been suspended for the current year. Who needs to put the banks through simulated stress when they’re in the middle of the real thing, right?
But at Q3 time, things looked just fine to me. Barclays’ CET1 ratio, which is its key stress test measure, had actually improved since before Covid-19 arrived. At 14.6% at 30 September, it’s up on December’s figure of 13.8%.
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Credit impairment charges did rise to £4.3bn (from £1.4bn a year previously), but the banks seems to have that covered well enough. And we’re looking at a tangible net asset value per share or 275p. That’s approximately 2.6 times the current share price, and up on last year.
2021 forecasts are strong and improving
You might not guess it from the recent Barclays share price performance, but forecasts are pretty upbeat right now. Well, for 2021 at least. In the current year, analysts expect EPS to fall around 60%, which isn’t great. But that would still represent a pre-tax profit of more than £2bn, which I think would be a good result in an allegedly disastrous year for banks.
On that alone, a forward P/E of 21 might not make Barclays a screaming buy. But forecasts suggest EPS in 2021 will return very close to 2019 levels, which would drop the P/E to only around nine.
I know forecasts are far from certain, especially this year. But analysts have been gradually raising their predictions as the year progresses. The consensus looks convincingly positive to me.
Dividend should boost the Barclays share price
The Prudential Regulation Authority stepped in this year to bring a halt to bank dividends. It’s arguable whether the regulatory body should have interfered in a free market — though the free market did lead to the banking crisis not so long ago. But anyway, whatever else happened, the suspension of 2020 dividends will surely have contributed to the fall in the Barclays share price.
Dividends will resume, for sure. The question is when and how much? Again, analysts have a recovery to pre-pandemic levels penciled in for 2021. And, on the current Barclays share price, we’d be looking at a yield of 4.4%. It would be more than 2.5 times covered by earnings too.
The 2020 dividend cut will surely have no adverse long-term effect. And I reckon it’s helped provide investors with an even better buying opportunity this year.
