Barclays (LSE:BARC) shares were hit by the Bank of England’s decision to raise interest rates by 50 basis points on Thursday. The stock is now down 10% over a month, and 9% over the course of a year.
As a result, we’re seeing Barclays trade at just 4.7 times earnings as investors give banks a wide berth, despite earnings more than holding up in recent quarter.
As a shareholder in Barclays, the falling share price naturally isn’t good for my portfolio. Not taking into account dividends, I’m down. However, channelling my inner Warren Buffett — the billionaire king of value investing — I think now’s an excellent time to top up.
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Value and quality
Despite its mistakes in recent years, I’d suggest Britain’s second largest high street bank is still a top-quality company. It has a defined position within the market, and benefits from moderate interest rate sensitivity due to its sizeable investment banking division.
And with the share price pushing down, it’s one of the cheapest stocks out there by earnings, while DCF calculations suggest it could be undervalued by as much as 78%.
These are two features that Buffett tells us to look out for as investors. I want to be buying stocks at a discount and I want to buy quality companies. For him, that’s Apple. As a UK-focused investor, that’s companies like Barclays and Haleon for me.
Headwinds and tailwinds
In recent quarters, performance was strong. Earnings per share (EPS) came in at 11.3p for the first quarter. That’s really considerable, given EPS came in at 30.8p for the whole of 2022.
And this largely reflects the impact of rising interest rates. While Barclays has less interest rates sensitivity than Lloyds, these changes make a huge difference. Barclays saw its net interest margin reach 3.18% in Q1, up from 2.62% last year.
For the quarter, group income rose 11% to £7.2bn, with pre-tax profit coming in at £2.6bn, generating a group return on tangible equity of 15%. All very impressive.
But while share price volatility may spur investment banking operations forward, there is concern about interest rates rising and its impact on bad debt. In Q1, bad debt provisions increased to £524m from £141m a year ago.
That figure reflected higher US cards balances and the continuing normalisation anticipated in US cards delinquencies. However, the UK mortgage market will likely be a focus for bad debt as interest rates hit 5% — and could go higher. This could be a bigger, but manageable, hit.
Right time to buy?
We all want to buy in at the right moment although, when investing for the long run, a percentage point here or there doesn’t make much of a difference. But we still want to buy low and sell high.
For me, this looks like a great opportunity to buy more. And I’ve been doing so. The dividend is attractive, has strong coverage (4.25 times), and the forward yield is 6.6%. I’m also optimistic about the medium term, when interest rates fall back to around 2-3% — something of a sweet spot for banks.
