Over the course of 2023, the Barclays (LSE:BARC) share price fell 3%.
The stock’s now trading around its mid-point for the year of 154p, which is pretty much where it was five years ago.
During the first quarter, it suffered due to events that were outside its control.
Three of the four largest bank failures in US history occurred in February and March, putting doubts in the minds of investors about the financial viability of others in the sector.
However, I think this was (and continues to be) unfair to Barclays, which has a strong balance sheet.
At 30 September 2023, it had a common tier equity 1 ratio (a measure of solvency) of 14% — comfortably above the required level of 4.5%.
Domestic exposure
But I think the lacklustre performance of its stock mainly reflects the fact that approximately 60% of the bank’s revenue is earned in the UK.
This means its financial performance will be heavily influenced by the fortunes of the domestic economy, which struggled to grow in 2023. The Bank of England hiked interest rates five times as it tried to bring inflation under control.
Although Barclays’s revenue has increased due to the higher interest rate environment, there’s an increased risk that its borrowers with variable rate loans will default.
Like all banks, it’s required to make a quarterly assessment of the quality of its loan book.
If there’s an increase risk of bad debts, it will record a charge (cost) in its accounts. Conversely, if the situation is improving, a credit (income) will be booked.
And the prospect of increased defaults has adversely affected its results.
For the first nine months of 2023, Barclays’s income increased by £625m, compared to the same period in 2022. But its impairment charge also went up, by £607m.
Excluding the £1.5bn in one-off legal charges incurred in 2022, the bank was less profitable in 2023.
Value for money
But using a common measure to assess whether a bank’s stock is undervalued — the price-to-book (P/B) ratio — suggests that it currently offers good value.
This compares its stock market valuation with its net asset value, as stated in its accounts.
Its P/B ratio is currently 0.34. This is below those of NatWest Group (0.55), Lloyds Banking Group (0.68), and HSBC (0.85).
If its shares were valued in line with those of NatWest, they would be 60% higher.
Inefficiencies
But I think Barclays attracts a lower valuation because it uses its assets less efficiently than its peers.
Analysts are expecting its return on tangible equity (RoTE) for 2023 to be 10.6%. To put this in context, Lloyds’s is likely to be 13%-14%.
This might not look like a big variance. But with an asset base of around £47bn, a few percentage points can make a huge difference.
Outlook
Looking ahead to 2024, analysts are expecting the bank’s profit after tax to be almost identical to 2023 (£5.9bn). And they are forecasting a small drop in its RoTE.
This lack of growth — along with its less efficient use of assets — doesn’t bode well for the Barclays share price.
Until its directors can better communicate how they plan to grow the business, and improve its operational efficiency, I don’t see its share price moving far from its current level.
