The Barclays (LSE:BARC) share price is flat over 12 months. That might not sound terrible, but a year ago UK stocks were in the doldrums after Liz Truss’s ill-fated premiership.
The stock was punished on Tuesday (24 October), falling as much as 8%, after the company lowered its net interest margin (NIM) guidance for the year and failed to provide guidance for 2024. This left the market on edge despite a significant earnings beat driven by consumer lending.
Is performance that bad?
Third-quarter headline profits at Barclays comfortably beat analysts’ forecasts. Pre-tax profit in the three months to 30 September was £1.89bn, well ahead of the consensus forecast of £1.77bn.
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In the quarter, total income amounted to £6.26bn. This reflected a 2% dip compared to the previous year.
The business was pulled upwards by the strong performance of the international consumer, cards, and payment division, which saw a 9% increase in sales, reaching £1.36bn.
However, this was offset by a 6% decline in investment banking income, which fell to £3.1bn.
In the UK speficailly, where Barclays makes the most of its sales, retail banking income saw a 2% decline. While business banking made gains, personal banking went into reverse.
In general, I see the performance as being pretty resilient considering the dire forecasts we’d seen for UK banking.
Nonetheless, Barclays shares were punished by investors for its guidance downgrade, with the NIM revised to 3.05-3.1%, down from earlier guidance of 3.15-3.2%.
Yes, banks are judged on their NIMs as it’s a key measure of profitability. However, we all knew that NIMs had peaked. So a reversal was inevitable, in my view. I do accept, however, that the lack of guidance for FY24 isn’t helping.
Valuation
The thing is, Barclays was already really cheap. So I was surprised to see the stock fall as much as it did.
The UK banking giant currently trades at just four times TTM (Trailing Twelve Month) earnings. That makes it one of the cheapest companies I’ve come across on the UK exchange.
It’s also half the price of some of its peers including Standard Chartered which trades at 9.2 times TTM earnings.
It’s also worth noting that Barclays’ current P/E and forward P/E (5.1 times) is far below its long-term average. Barclays’ operated at median p/e ratio of 12.8 times from fiscal years ending December 2018-2022.
Moreover, one of the most telling metrics is the price-to-book (P/B) ratio. This tells us how a company’s market value compares to the value of its assets. Barclays trades at just 0.4 times book value, inferring a 60% discount versus its tangible net asset value.
By comparison, HSBC trades at 0.9 times book value and Standard Chartered at 0.58 times. US banks tend to trade equal to or above their net asset value. JP Morgan, for example, trades at 1.41 times its book value.
Does Barclays deserve this discount to the market? In my view, absolutely not. NIMs remain strong, impairment charges are manageable, and the investment business can only improve.
If I have spare cash, I’ll make the most of this opportunity to buy more.
