FTSE 100 stocks have lost a collective 5% in value since the beginning of March. As a long-term investor, I find this very exciting. It gives me a chance to buy some brilliant companies at knock-down prices.
Britain’s banks like Barclays (LSE:BARC) have fallen particularly hard in recent weeks.
Further weakness could be around the corner as worries over the global banking sector linger. Yet the FTSE firm’s current valuation seems to warrant serious attention.
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Barclays’ share price trades on a forward price-to-earnings (P/E) ratio of 4.7 times. It also offers up a bulky 6.2% dividend yield.
I’ve had a fresh look at the high street bank. And even at today’s prices, I’m not tempted to buy its shares for my investment portfolio. Here’s why.
Rate uncertainty
Look, things aren’t all bad for UK banks. For one, I like the big boost rising interest rates are providing to their margins.
Last week, the Bank of England raised its benchmark again for an 11th straight time, to 4.25%. Extra monetary tightening could be around the corner too as policymakers act to stem inflationary pressure. Higher rates raise the margin between the rates Barclays and its peers offer on savings products and on loans.
However, huge uncertainty remains over future interest rate movements as the UK economy toils. There is also growing pressure on the banks to offer better rates to savers in a further threat to margins.
A report by Sky News says that savers are missing out on a staggering £23bn a year due to banks not sharing the benefits of interest rate rises to their customers. The scandal could lead to fresh scrutiny on high street banks’ practices from the Financial Conduct Authority (FCA).
Competitive threats
The bad press could also boost consumer interest in challenger and digital banks which are growing strongly. Customer interest in these new operators is already increasingly rapidly.
Price comparison website Finder says that almost a quarter of Britons already have a digital-only bank account. And it predicts the number of digital-only bank account holders will soar to 22.6m by 2028, from 12.6m today.
Demographic challenge
Barclays has a key feature in its favour. Since its founding 332 years ago, the business has cultivated one of the strongest brands in the banking industry.
The importance of customer trust cannot be underestimated when it comes to looking after people’s money. That Finder research also revealed that 24% of traditional bank account customers “do not trust digital-only banks”.
However, Barclays seems to be swimming against the tide as a new generation of banking customers with a different perspective emerges.
The Finder research also showed that 31% of Gen Z consumers — those born in the mid-to-late 1990s — already have a digital-only banking account. A further 18% plan to get one by the end of the year.
Clearly, the pull of traditional operators like Barclays is steadily waning. And this casts a long shadow over the FTSE company’s long-term profits outlook.
