In March 2020, at the height of the Covid crash, the Barclays share price (LSE: BARC) bottomed at 78p. Fast forward five years and the stock’s trebled.
Trading at levels not seen since before the global financial crisis, I feel it’s now time for me to re-evaluate whether it still deserves a place in my stocks and shares ISA.
Structural hedge
A few years ago, most investors didn’t really appreciate the importance of the structural hedge to the company’s bottom line. It certainly took me some time to get my head around its core principles.
A typical bank’s balance sheet of assets and liabilities will consist of a mix of fixed and floating interest rate products, with varying durations. As a result of mismatches in rate exposure of these different products, without some form of hedging a bank could be exposed to significant risk.
These risks can be catastrophic. When interest rates began rising in 2022, Silicon Valley Bank’s huge bet that rates would stay ultra-low indefinitely spectacularly backfired. As the value of government bonds tanked, a run on the bank resulted in a gaping hole in the balance sheet. The rest is history.
Stable source of income
In 2025, the real risk to a bank isn’t rising but falling interest rates. However, despite two rate cuts in 2024, net interest income (NII) improved slightly on 2023 to £13bn. Compared to 2022, its up 22% and today accounts for 50% of its total income.
The secret sauce is structural hedging. Fixed rate, or rate-insensitive products such as current accounts and certain savings products, are effectively swapped into a floating rate.
To effect the hedge, it uses interest rate swaps. The swaps are received at a fixed rate and pay a floating rate. As a consequence of entering into such a contract they will smooth income through the interest rate cycle and protect NII from a sharp or unexpected fall in rates.
Future cash flows
The structural hedge has undoubtedly been the biggest driver of Barclays profitability over the past couple of years. Last year it both benefited from falling rates and the fact that rates didn’t fall as much as was predicted.
As a result of the structural hedge, over the next two years it has locked in £9.1bn of gross income. But what about beyond that? Medium term, I can’t seen anything other than interest rates falling. They simply have to because interest expense on government debt is reaching crisis level. In the US, interest expense is larger than the entire defence budget.
At the moment the UK credit picture remains quite benign, and delinquencies are stable. Barclays is betting this will remain the case. I’m not so sure. To me the UK economy’s not in a healthy state.
It’s a similar story in the US. Beneath the veneer of a booming US stock market, the labour market’s weakening, the consumer’s tapping out and a cost-of-living crisis is still alive and kicking.
Despite trading at a rock bottom valuation, I’m not sure how much higher its share price can climb. For now, I remain invested for the dividend, but I certainly won’t be adding any more.
