The Barclays (LSE: BARC) share price has performed strongly in 2021, rising around 24%. Yesterday, it rose further after the Bank of England’s announcement that it was raising interest rates. This is a major sign of confidence in the UK economy’s resilience, as well as potentially helping Barclays raise its profitability.
A terrific 2021 performance
Barclays has performed extremely well in 2021, and earnings per share are forecast to reach 34p for the year. This is significantly higher than every single year since 2008 and would put the bank on a price-to-earnings ratio of under 6.
Further, the investment banking segment of the firm has seen huge success over the past year, helping Barclays outperform its competitors. For example, in the third quarter, investment bank revenues surged by 14% year-on-year. This was driven by a surge in M&A deals and private equity buyouts, which have led to increased fees for Barclays. Nonetheless, there is the risk that such activity will decrease next year, and revenues will decline.
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Even so, I think that any decrease in revenues from the investment bank can be made up for through the company’s lending business. This is because of the recent interest rise from the Bank of England from 0.1% to 0.25%. Such a rise should help make up for any lost revenues in the investment business. This will hopefully have a long-term positive effect on the Barclays share price.
The risks
Despite these positive signs, there are some things to watch out for. For example, 2022 profits are unlikely to reach 2021 levels. This is because this year’s profits include credit impairment releases of around £622m so far, which occurred because the impacts of Covid were not as severe as initially feared. Next year, there are likely to be some impairments, even though they are projected to be below historical levels. They will still have an adverse effect on profits, however, in comparison to the positive effect this year. This means that the current P/E ratio of under 6 must be taken with a pinch of salt.
Further, the impacts of Omicron may be severe, especially if businesses start to struggle. This could lead to a far higher default rate and cause Barclays to lose money. As such, in the case of additional restrictions the harm the economy further, the Barclays share price may be hit hard.
Why am I still confident about the share price?
While there are several risks, I think that these are mainly factored in to the Barclays share price, except for the prospect of a full lockdown. Further, over the next few years, I expect that interest rates will continue to rise, and this should have a positive effect on the profitability of the bank.
Further, after announcing an interim dividend of 2p per share earlier this year, the full-year dividend is forecast to total around 6p per share. This is equivalent to a yield of over 3%, another reason for me to buy the shares. As such, I’m very tempted to add more to my portfolio.
