Barclays (LSE:BARC) shares once traded for more than 700p each. It was a banking behemoth prior to the financial crash of 2007. In fact, it’s currently down around 80% from its all-time high of 790p on February 23 2007.
I’d consider Barclays to be a particularly unloved stock. It’s certainly not been popular with investors since the Brexit vote, and more recently, the share price has been pretty volatile. Its down 28% over six months and 12% over the year.
But investors will have noticed that Barclays is looking very cheap right now by some metrics. In fact, it’s the cheapest bank on the FTSE 100 according to the price-to-earnings (P/E) ratio.
So, here’s why I’d buy Barclays stock.
Valuation
Firstly, it looks cheap. It’s got a P/E ratio of just four and a price-to-sales ratio of 1.1. That’s phenomenally cheap. In fact, I’d be forgiven for thinking that something must be wrong.
Barclays continuously battles with Lloyds Banking Group to be the second largest bank in the UK. Lloyds is also cheap with a P/E ratio of 5.6. The UK’s largest bank, HSBC, is a little more pricey. It has a P/E ratio of 10.1. That makes it twice as expensive as Barclays.
Performance
One of the reasons Barclays looks cheap is because 2021 was a good year for the bank and the share price has tanked in 2022.
In February, it reported a record annual profit for 2021. The lender said pre-tax profits were £8.4bn for the year, above analyst expectations and nearly triple the £3.1bn of a year earlier.
The bank also committed to return £2.5bn to shareholders via dividends and buybacks, as bad loan charges plunged and its investment banking arm continued to deliver.
The first quarter of 2022 was also positive. Total income for the quarter rose 10% to £6.5bn, despite big litigation and conduct charges.
Prospects
As for its future prospects, this is where there’s some uncertainty.
The UK economy is expected to go into recession in the coming months and that’s not good for banks. Barclays generates around 66% of its revenue in the UK. Around £7.5bn came from the US, where the economic forecasts are also negative, but not quite as bad as the UK.
Recession means bad debt and it’s likely that the investment arm won’t perform well in such an environment.
But there are other things to consider. First, I think the negative economic forecasts have already been priced in.
But also, banks are still performing well. Credit Suisse recently said it expected upgrades to lenders’ guidance for net interest margins and net interest income. Because interest rates have been raised, banks are earning more on the money they lend.
They’re even earning more interest on the money they leave with the Bank of England.
In the long run, I expect the UK economy to continue to grow. There are definitely teething Brexit-related issues right now, but I’m optimistic that things will improve after the transition. That will be good for banks like Barclays. I own the stock and would buy more today.
