Over the past year, Barclays (LSE:BARC) shares have fallen by 18% (at the time of writing). This is significantly worse than the FTSE 100 performance as an index, as well as underperforming several peers in the banking sector. Yet I recently bought some stock in the bank. Here are three reasons why.
Price-to-book ratio
I don’t want to get too technical here, but a key factor in my purchase relates to the price-to-book ratio of Barclays. The ratio looks at the current share price in relation to the book value (total assets minus total liabilities).
In a perfect world, the ratio would be one, reflecting that investors believe the book value of the firm tallies with where the stock is trading. For Barclays, the ratio is 0.4. This is a very low figure and makes me feel the share price is too low.
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Of course, the book value for a bank is difficult to accurately compute. Some of the liabilities can be hard to value correctly. I’m not expecting the ratio to be at par any time soon. But I do feel that a fair ratio is around 0.6. If the book value stays the same, the share price would need to jump by 50%.
Turnaround plan
Next month, the CEO is due to announce more details relating to a new strategy push for Barclays. This involves details about how the bank will allocate capital, along with more cost-cutting measures.
It’s good to see that action is being taken to address what is currently an underperforming bank. In the years to come, this should yield benefits.
Measures to improve profitability is also great. Granted, in the short run this could cause the stock to fall due to the extent of potential cuts. Yet I’m happy to hold this for the long term, when the efficiency benefits should be seen more clearly.
Higher for longer interest rates
A month ago a lot of chat was about how quickly interest rates could fall. Yet after the latest inflation reading came in higher than expected, some are now thinking the base rate will stay higher for longer.
Only time will tell, but certainly if this is the case then it’s a positive for Barclays. It should be able to enjoy higher net interest income into 2024 than previously expected. This should help to boost profits. I don’t think this outcome is fully factored in to the current share price.
This is a potential risk, though. Should this situation turn again (it’s very fluid) then the stock could be negatively impacted if interest rates fall quickly.
I don’t know if Barclays shares will rally next month or even next year. But I do believe that the current share price is too cheap to ignore. I think investors should consider adding the stock to a diversified portfolio.
