Earnings season is upon us, and that’s got me thinking about the potential value of FTSE 100 stocks in other sectors.
I have one big-name bank that I’m zeroing in on today. That’s because the Barclays (LSE:BARC) is up more than 50% since the start of 2024. It’s got me thinking — could the British bank actually be a good value buy?
Sleeping giant in the Footsie?
Don’t get me wrong, Barclays is a well-known stock in the Financials sector. The British bank has a £34bn market cap, and has continued to track higher in 2024.
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I am intrigued by banking given where we are in the business cycle right now. Interest rates are high, the economy looks to be on a knife edge, but there is also some optimism with the general election out of the way.
The recent share-price growth has reflected both strong conditions for banks generally as well as Barclays’ competitive position.
One thing I really like the look of is its return on tangible equity (RoTE). The bank reported 12.3% RoTE for the quarter ended 31 March 2024, which is ahead of both its 2024 and 2026 targets. A cost to income ratio of 60% also showed me signs of management discipline, which I like to see given the potential risks in the economy right now.
What does the relative value look like?
What I am interested in is how it stacks up against both the FTSE 100 index and other big-name banks like NatWest and HSBC.
Barclays has a 3.4% dividend yield right now, which is slightly below the Footsie average. However, when compared to 4.8% for NatWest and HSBC’s 7%, it doesn’t seem as strong a pick for dividend investors.
The NatWest share price has also been strong, with over 50% gains in 2024. HSBC has been more meagre, in the single digits.
One key valuation metrics for bank shares is the price-to-book (P/B) ratio. This measures the company’s share price against the value of its net assets on the balance sheet.
NatWest trades at a P/B of 0.74 while HSBC is at 0.65. What about Barclays? A meagre 0.46. That means investors are paying 0.46p per £1 of net assets on the books.
This says to me that either there is a reason why investors are avoiding Barclays, or it could be a bargain hiding in plain sight.
What are the downsides?
There is the broader risk to banks that could come from interest rate cuts. We could see more spending and less saving, reducing funds available for banks to lend out and earn money on.
However, Barclays specifically also has some risks to it. For one thing, the company has been plagued by issues in recent years. A rightsizing of investment banking activities is part of its three-year plan, and the bank continues to work on turning around its fortunes.
Where to next?
Barclays is set to announce its half-year results tomorrow. I’ll be tuning in to see how well its investment banking division has performed, and also to track its net interest margin movements.
If the results are strong and the outlook is positive, Barclays could go on my ‘want-to-buy list’ for when I get some free cash, despite some question marks on future growth.
