Inflation has been soaring this year and banking stocks like Barclays (LSE: BARC) are expected to do better in a high interest rate environment. That is why I am left scratching my head after the Barclays share price has dropped by 25% so far in 2022. So, what are the reasons for the share price underperforming?
The ripple effect
The problems Barclays are facing today really began in 2017. Back then, the US Securities and Exchange Commission (SEC) found the bank guilty of overcharging thousands of customers. As a result, it fined Barclays $97m. This was a mere drop in its earnings ocean, so it paid the fine without any issues.
Fast forward to 2022 and Barclays’ drop has now become a much bigger ripple. Prior to 2017, Barclays could trade exchange traded notes (ETNs — A form of securities) without thinking twice about certain limits. However, this privilege was revoked as a result of the aforementioned fine. So, when Barclays filed for a new ‘shelf registration’ limit in 2019, it didn’t qualify for the automatic limit increase. Essentially, Barclays now had limits on the number of securities it could sell.
Out of stock
What does all that mean? Well, ETNs are a form of securities as mentioned. These notes typically offer to pay a return based on the performance of an underlying asset, like an ETF. The only difference is that unlike ETFs, ETNs are not backed by assets, and cannot be liquidated.
And what does this have to do with Barclays? Well, the bank realised that it blew past its shelf registration limit by a whopping $15.2bn last month. Consequently, it suspended sales of notes that tracked the VIX index and crude oil. Unfortunately, the damage doesn’t stop there. The SEC ruled that Barclays has to purchase ETNs at the original price of issue for every note that was sold past its registration limit. This means that if new notes for the VIX were issued in March 2020, Barclays would have to buy back these for a whopping $242 per note. That is almost 10 times their current value! Thus, it now has a $600m loss in its accounting books.
Having said that, its $1bn stock buyback has also been delayed. I would argue that the delay of its share buyback programme serves as a bigger catalyst to the share price dropping than the ETN issue.
Buy the dip?
With a price-to-earnings ratio of four, do I see Barclays as a bargain? After all, the $600m in losses is less than 2% of its market cap so it shouldn’t hurt its margins too badly. The Barclays share price does have tailwinds with rising interest rates too. However, it’s worth noting that borrowing, from which Barclays earns the bulk of its revenue, could slow down if central banks hike interest rates too sharply. With earnings season coming up, I will be monitoring the results and guidance of big banks to determine the economic outlook. February’s GDP numbers show a sharp decline in economic growth. So I will tread with caution before I consider adding Barclays to my portfolio and am not a buyer today.