As I write these words, the Barclays (LSE: BARC) share price is down 26% over the past 12 months.
The reasons might seem obvious. With inflation soaring, the Bank of England is pumping up interest rates. And a recession looks to be approaching rapidly. So it’s natural that bank shares will be on a downer.
But at times like this, I remember ace investor Warren Buffett‘s thoughts on how great it is to buy a wonderful company at a fair price.
Best bank?
Is Barclays a wonderful company? I think it’s been possibly the UK’s best-managed bank for the past couple of decades (apart from one or two lapses). And its balance sheet and liquidity look rock solid to me. I can’t say there’s no chance it will go bust in the next few years, but I’d rate the probability as vanishingly low.
Barclays has also retained its international business, and has remained involved in investment banking. I think that gives it a defensive global nature. Lloyds Banking Group, which would also vie as the most attractive bank in my books, took a very different approach following the financial crisis.
Lloyds refocused on UK retail banking, and has become deeply involved in the housing market. It’s more exposed to the UK government’s approach to the economy — which, I think it’s fair to say, has not met with universal acclaim. This means Lloyds it’s very susceptible to a property downturn and any mortgage crisis.
Valuation
The other part of Buffett’s thought is the fair price thing. Though Lloyds is tied more closely to the UK’s troubled economy, its share price has fallen only 10% in the past 12 months. Barclays shares have lost two-and-a-half times as much.
How does the valuation look? Forecasts put Barclays on a price-to-earnings (P/E) multiple of 5.3 with a 5% dividend yield. Lloyds’ forecast P/E stands at 6.2 with the dividend yield at 5.7%.
Those look comparable to me. One’s a bit more pricey, for a bigger dividend yield. Both valuations, though, look painfully low compared to the FTSE 100 long-term average.
Barclays problems
Some of Barclays’ apparent undervaluation will surely be down to a blunder by the bank. First-half profits took a hit of £1.9bn in litigation and conduct charges. That’s down to the bank selling more securities products in the US than it was allowed to.
It’s not Barclays’ first financial misbehaviour issue either, and it must have damaged confidence with some investors. But I suspect these events will fade from memory fairly quickly if the bank gets profits moving back in the right direction.
Risk
I think it’s definitely risky buying any bank shares right now, with our current economic outlook. Barclays made provisions for bad debt in the first half, and those could well escalate in the second half.
But high interest rates should boost lending margins. And the current valuation makes me think the shares are oversold. With my next investing instalment I’ll probably buy bank shares, and they’ll be either Barclays or more Lloyds.