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Barclays (LSE: BARC) is one of the UK’s leading banks, with a strong global presence. In the last 12 months, its shares have performed well, rising 8%. However, so far in 2023, Barclays shares have struggled to gain momentum, falling almost 6%.
Much of this decline can be attributed to the challenging macroeconomic outlook, which directly affects the banking sector. Could this drop present me with an opportunity to pick up some cheap stocks? We’ll see.
Tempting rating
The bank’s stock is currently trading at a price-to-earnings (P/E) ratio of 4.5, which seems very reasonable to me. For context, the FTSE 100 The average P/E ratio usually hovers around the 12 to 14 mark. In addition to this, the Blue Eagles’ closest competitor in the UK, Lloyd’s, trades at a higher ratio of six. These markers indicate that the current share price of 154p could have significant room to grow.
In addition to its attractive valuation, the stock currently offers a healthy 5% dividend. Once again, this comfortably beats the FTSE 100 average. With inflation still high, a healthy dividend is a great way to protect my portfolio. Therefore, Barclays’ dividend is a big red flag for me.
Mixed results
Barclays has reported mixed results so far this year. Its first-quarter 23 results far exceeded analyst expectations, with profits up 27% compared to the previous year. However, this momentum was stifled after the release of its second quarter 2023 results.
Although revenue in both the domestic division and the consumer and cards division increased by 14% and 18%, respectively, net income did not meet analysts’ expectations. In addition to this, Barclays announced that it expected to receive a lower net interest margin at its national bank in the future. In simple terms, this means that the spread between what the bank pays in deposits and what it receives in loans will narrow. Investors seemed disappointed by the news and shares fell 5% during the trading day.
However, a big advantage for Barclays is its diversified revenue streams. Its investment banking and corporate finance divisions differentiate it from other UK-focused banks such as Lloyds, which focus solely on commercial banking. This could help increase revenue during difficult macroeconomic cycles.
The current macroeconomic environment is a double-edged sword for banks like Barclays. Higher interest rates mean the bank can charge higher rates on loans, but also needs to pay more on deposits.
Barclays’ guidance from its second quarter results seems to indicate that the latter may outperform the former, hurting profitability. In addition to this, the cost of living crisis, fueled by high inflation, could lead customers to default on their loans.
what i’m doing now
Overall, despite the volatility facing the UK banking sector, I am bullish on Barclays shares. In my opinion, the stock seems very undervalued, especially considering its healthy dividend. In addition to this, the diversified income that the bank had access to through its different divisions is a great advantage. As such, I am considering buying shares for my portfolio at 154p.
