Barclays (LSE: BARC) is one of the UK’s leading banks, with a strong presence globally. In the past 12 months, its stock has performed well, rising 8%. However, so far in 2023, Barclays shares have struggled to gain momentum, down almost 6%.
Much of this fall can be attributed to the challenging macroeconomic landscape, which directly affects the banking sector. Could this drop present an opportunity for me to scoop up some cheap shares? Let’s take a look.
Enticing valuation
The bank’s shares currently trade on a price-to-earnings (P/E) ratio of 4.5, which seems very reasonable to me. For context, the FTSE 100 average P/E ratio usually hovers around the 12 to 14 mark. In addition to this, the Blue Eagles’ closest UK competitor, Lloyds, trades at a loftier ratio of six. These markers indicate that the current share price of 154p could have significant room to grow.
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In addition to its enticing valuation, the stock currently offers a healthy dividend of 5%. Yet again this comfortably surpasses the FTSE 100 average. With inflation remaining high, a healthy dividend is a great way to protect my portfolio. Hence, the Barclays dividend is a big green flag for me.
Mixed results
Barclays has reported mixed results so far this year. Its Q1 23 results far exceeded analyst expectations, with profits rising 27% compared to the previous year. However, this momentum was stifled after the release of its Q2 2023 results.
Although revenues in both the domestic division and the consumer and cards arm rose by 14% and 18%, respectively, net income failed to meet analyst expectations. In addition to this, Barclays announced that it expected to receive a lower net interest margin in its domestic bank moving forward. In layman’s terms, this means the spread between what the bank pays on deposits and what it receives from loans will shrink. Investors seemed disappointed by the news, and the shares tumbled 5% during the trading day.
However, a big plus for Barclays is its diversified revenue streams. Its investment banking and corporate finance divisions set it aside from other UK-focused banks like Lloyds, that solely focus on commercial banking. This could help pad out revenues during tough macroeconomic cycles.
The current macro environment is a double-edged sword for banks like Barclays. Higher interest rates mean the bank can charge higher rates on loans, but it also needs to pay more on deposits.
Barclays’ guidance from its Q2 results seems to indicate that the latter may outweigh the former, harming profitability. In addition to this, the cost-of-living crisis, fuelled by high inflation, could lead customers to default on loans.
What I’m doing now
Overall, despite the volatility faced in the UK banking sector, I am bullish on Barclays shares. To me, the stock looks well undervalued, especially considering its healthy dividend. In addition to this, the diversified revenues that the bank had access to through its different divisions are a big plus. As such, I am considering buying shares for my portfolio at 154p.
