The waves of risk-aversion that smashed financial markets in October caused barely a flicker at Barclays (LSE: BARC).
I predicted that it would only be a matter of time before the FTSE 100 bank resumed its long-running downtrend, though, and so it has come to pass. In rough November trading, Barclays has plunged again and it recently closed at its cheapest since the summer of 2016, a time when the British electorate’s decision to exit the European Union in that now-infamous referendum put investors in a state of panic.
There’s a certain symmetry to this recent share price action, what with the recent Parliamentary deadlock over how to proceed with Brexit causing speculation over a no-deal departure to hit fever pitch. Barclays’ share price has lost a whopping 25% of its value so far in 2018, and I foresee another year of contraction in 2019.
Brexit bothers
Let’s deal with the Brexit-shaped elephant in the room first of all. It’s an issue that I’ve drawn attention to time and again as the UK’s painful exit from the EU evolves, and government analyses on Wednesday detailing the economic impact of the transition show how conditions in Barclays’ key market will suffer however Brexit is executed.
They showed that if the UK’s exit fell along the lines of Theresa May’s current deal with Brussels, domestic GDP growth would take a hit to the tune of 3.9% by fiscal 2035/36. But that’s nothing — an increasingly-possible no-deal scenario would whack the economy by an eye-watering 9.3%.
Clearly, the long-term picture for Barclays is a worrying one, and it threatens a spike in bad loan impairments and a possible collapse in retail revenues. And the outlook for the nearer term promises to be even more troublesome, particularly if the UK lurches into a recession.
Right now, City analysts are forecasting a 4% earnings rise for the bank in 2019. This is in serious danger of getting hacked down however, so I’m not tempted to buy in, even though Barclays subsequently trades on a dirt-cheap forward P/E ratio of 7.6 times.
Short of cash
Those long-running concerns over the balance sheet have come into focus again as investors have considered the potential impact of Brexit on its operations. And recent stress testing from the European Banking Authority has worsened the tension, a study which showed that the Footsie firm, with a CET1 ratio of 7.3% under an ‘adverse’ scenario, is one of the continent’s worst-capitalised banks.
It passed the Bank of England’s own tests on Wednesday, but under these forecasts its capital ratio, of 6.9%, was even worse. This is particularly problematic as PPI-related claims at Britain’s banks build ahead of next summer’s claims deadline. In the current climate I believe it’s possible that Barclays could struggle to meet one or both of the City’s dividend projections of 6.6p and 8p per share for 2018 and 2019 respectively, figures that yield 4.7% and 4.8% for 2019.
All things considered, Barclays simply carries too much risk at the current time, and there remain plenty of reasons to predict that its share price will suffer further in 2019. It’s best to be avoided at all costs, in my opinion.