Despite what some of the headlines are saying, the FTSE 100 has been very resilient this year, declining by less than 2%. UK interest rates are at a 14-year high so the stock market may not be so resilient this time next year. While not ideal for most companies, higher rates are a silver lining for the bottom lines of big lenders. From my perspective, Barclays (LSE:BARC) shares rank above the rest right now. Here’s why.
Best of the FTSE 100 banking shares?
I find the bank appealing because of its diversified business model. It means many of its business lines are less exposed to the direction of the UK economy.
Despite this positive, shares in the more domestically-focused Lloyds Bank have outperformed Barclays this year, while Lloyds also pays a higher dividend. However, unlike Lloyds and NatWest, Barclays has an its international presence, operating worldwide, and it has a large investment banking section alongside its retail bank offerings. It’s not solely reliant on an unpredictable UK, nor retail banking alone.
It’s for this same reason that HSBC ranks above Lloyds for me. It’s the second-largest bank in Europe, and also a worldwide operation. With the UK now in a recession, diversification away from the domestic market is paramount for long-term prospects.
Superior growth ahead for the shares?
The poor performance of Barclays shares across 2022 has made its valuation incredibly attractive to me. In fact, all the key banking shares are trading at relatively low price-to-earnings valuations. Barclays shares are the cheapest of the lot (a P/E of 4.7 versus FTSE 100 P/E of 14). In fact, it’s one of the cheapest blue-chip banking stocks listed on the London Stock Exchange.
Though I find HSBC stock similarly attractive, it comes at a premium compared to Barclays. The premium is an illogical one from my perspective as I feel HSBC have greater long-term risks.
Where HSBC has been fighting greenwashing accusations, Barclays has seriously stepped up its ESG-linked business practices. The Group’s Sustainable Impact Capital investment mandate is set to triple in size by 2027. Although Barclays isn’t immune to an unexpected scandal or two, I certainly feel its discount compared to peers is a buying opportunity for me.
My next move
I firmly believe financials could be one of the few sectors to benefit from higher interest rates.
My biggest preference is for Barclays because I think it has the most resilient underlying business model in the current environment. The group achieved income growth in each of its three businesses year on year in the third quarter. By contrast, its nearest rival HSBC missed revenue expectations by quite some distance.
However, there are some clear risks. Though it may benefit from higher interest rates, it may also suffer from being the most exposed UK bank to highly geared transactions and leveraged buyouts. Default risk is certainly a factor for me to monitor regarding Barclays stock.
Weighing this all up, I’m not in a rush to buy bank stocks for my portfolio right now. But I’ll revisit it early next year, and Barclays will certainly be top of my list if I buy bank shares.
