Barclays (LSE:BARC) shares have fallen 14% since the start of October 2023. Much of this decline occurred on 24 October, when investors reacted badly to the bank’s third-quarter results.
Despite beating profit expectations, its stock closed the day 6.5% lower. The trading outlook was less positive, which probably prompted the sell-off.
The bank’s estimate of its net interest margin for 2023 — the difference between the amount earned on loans and that paid on deposits — was downgraded from 3.15%-3.2% to 3.05%-3.1%.
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All this means the shares are currently changing hands for around 136p, which is only 6% above its 52-week low of 128p.
Look at the balance sheet
By one key measure, the shares appear to be significantly undervalued.
The price-to-book ratio (P/B) compares a company’s stock market valuation with its accounting value. Barclays currently has a market cap of £20.6bn. And its balance sheet at 30 September 2023 showed net assets of £69bn. Dividing one by the other gives a P/B ratio of 0.3.
This compares favourably to the other big banks in the FTSE 100. HSBC (0.73), Lloyds Banking Group (0.56) and NatWest Group (0.44) all have valuations closer to their book values.
In its latest global banking review, McKinsey & Co claims the average for all banks in 2022 was 0.9.
To put this in perspective, if Barclays could achieve a similar P/B its share price would be over three times higher. The figures above show that all of the UK’s banks are achieving valuations lower than the global average. Even so, if Barclays was valued the same as NatWest, its shares would be worth 47% more.
Cost control
I think shareholders in the UK’s third biggest bank are likely to experience a difficult few months.
When it comes to controlling costs, it lags behind other financial institutions. McKinsey’s survey found that the average ratio of costs to income was 52%. Barclays was 61% for the nine months ended 30 September. Worryingly, it was 63% during the third quarter.
If the bank matched the global average, its profit before impairment charges would have been £1.78bn better (22%) during the first nine months of 2023 — £2.37bn on an annualised basis. With a current price-to-earnings ratio of 4.3, this improvement in earnings would have added £10bn to its market cap.
Conscious of rising costs, the directors have said they’re “evaluating actions to reduce structural costs to help drive future returns“. They warn this “may result in material additional charges in Q4 2023“.
It sounds to me like the bank’s earnings are unlikely to improve soon.
And that’s why I’m not going to invest. Although the cost savings will help over the medium term, I think there’s going to be some disappointing results over the next few months, putting further downwards pressure on the share price.
Payments to shareholders
But some will point to the bank’s yield as evidence that the shares are something of a bargain.
The consensus amongst analysts is for a dividend of 8.5p in 2023. If correct, the shares are currently yielding 6.3%. This compares favourably to the FTSE 100 average of 3.9%.
However, I’m still not tempted.
There are stocks of other companies offering better returns at the moment, businesses that I think have better visibility of their short-term earnings.
