The Barclays (LSE: BARC) share price fell by more than 50% between January and April, but the shares look set to end the year down by a less scary 20%, at around 150p.
2020 hasn’t turned out quite as badly as expected. But I suspect many investors will have held the stock from the 230p+ levels seen in 2017. They’ll be wondering whether 2021 will be the year when their investment finally breaks even. Here, I’ll explain why I remain positive on Barclays, despite an uncertain outlook.
Good news
There’s some good news. Barclays’ profits during the first three quarters of 2020 were higher than originally expected. 2020 earnings forecasts rose by 70% in November, after the bank reported a pre-tax profit of £2,419m for the nine months to 30 September.
Barclays’ secret sauce was its investment banking division, which profited from the high levels of trading seen during the market crash. Income in this business rose by 24% to £9.8bn during the nine-month period. This helped to offset a 21% drop in revenue from Barclaycard and a 12% fall in revenue from Barclays’ high street business.
Thanks to the forced cancellation of banks’ dividend payments, Barclays balance sheet also improved. The bank reported a significant increase in the amount of surplus capital available.
Bad news
Despite these solid results, I can see plenty of good reasons why Barclays’ share price has lagged the wider market recovery this year.
In the short term, we still face the risk of a recession as the pandemic eases. The government has put generous support measures in place to help businesses survive lockdown but, eventually, things will return to normal. When this happens, losses from bad debts could rise further. New lending may also fall.
Looking further ahead, I think banks could still face the same problems they had before Covid-19. With interest rates at record low levels, it’s just not that easy for the banks to make money.
We can see this from the bank’s 2019 results. Barclays’ generated a return on tangible equity of just 3.6%. That’s a long way below the bank’s medium-term target of 10%.
My view on the Barclays share price
Unless interest rates rise, I’m not sure how UK banks like Barclays are going to hit their profitability targets. This could keep a lid on the bank’s share price.
Although Barclays’ net tangible asset value per share of 275p suggests the shares are cheap at around 150p, this valuation may be justified. My analysis suggests the shares are probably quite fairly valued at current levels.
City brokers seem to agree. Forecasts for 2021 put the stock on a price/earnings ratio of 10, with a 3.5% dividend yield. For a large, mature bank with limited growth potential, this valuation seems high enough to me.
Will Barclays’ share price return to 230p? I think it could take a while, unless interest rates rise. A surge in inflation next year could push rates higher, but it’s certainly not a sure thing.
On balance, I think Barclays looks reasonable value at current levels. I’d consider buying the stock, but I wouldn’t expect fireworks.