What will it take for investors to start buying banking shares again?
It’s a question that Jes Staley, chief executive of Barclays (LSE: BARC), may be asking this morning. Despite issuing a strong set of third-quarter results that beat market forecasts, the Barclays share price was up by less than 1% after the first hour of trading.
Of course, as Foolish investors we’re interested in gaining an advantage over the market, not simply following the crowd. If Barclays’ stock is cheap and the bank’s performance is improving, now could be the perfect time to buy. Let’s take a closer look at the figures to find out more.
Profits +23%
The bank’s underlying pre-tax profit rose by 23% to £5,267m during the first nine months of the year. This figure excludes misconduct and litigation charges, which have added up to £2.1bn so far in 2018.
Although this figure seems pretty shocking, I think it’s fair to assume that things should now improve. The deadline for PPI claims is 29 August 2019, and the bank’s £1.4bn settlement with the US Department of Justice, relating to mortgage derivatives, should be final.
So by this time next year, these legacy costs could be falling very fast, giving a boost to profits.
More profitable
The bank says the main reason for the increase in underlying profit was a 53% reduction in impairment charges. Much of this is a one-off improvement resulting from accounting changes, but it’s still helped to lift the bank’s return on average tangible shareholders’ equity to 11.1% for the nine months to 30 September, up from just 0.8% last year.
Return on equity is one of the main measures of profitability for banks. And although the 11.1% figure excludes misconduct and litigation costs, I still think it’s a good result.
Does the bank have enough cash?
Staley is keen to increase dividend payments in order to reward long-suffering shareholders. But he’s had to wait until this year to do this, because Barclays hasn’t been generating enough surplus capital.
Today’s figures suggest this situation might be changing. The main regulatory measure used to monitor banks’ surplus capital is Common Equity Tier 1 (CET1) ratio. Barclays’ CET1 ratio was 13.2% at the end of September. Although that’s down slightly from 13.3% at the end of 2017, this stable result has been achieved despite £2.1bn of misconduct and litigation costs. Without this headwind, the bank says its CET1 ratio would have been 13.85% at the end of September.
I’m going to stick my neck out
London-listed bank stocks have been falling this year, despite stable or improving results. The only reason for this that I can see is that the market is pricing in future problems, such as a rise in bad debt or a slowdown in economic growth.
I don’t know how likely this is. But I do know that using most common measures of value, Barclays shares look attractive to me at current levels.
After today’s results, the stock trades at a 35% discount to its tangible net asset value of 260p per share. Forecast earnings for 2018 put the stock on a price/earnings ratio of 7.8, with an expected dividend yield of 3.9%.
Barring the risk of economic meltdown, I think Barclays’ shares rate as a buy.