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About Barclays
Headquartered at One Churchill Place in London, England, Barclays is one of the world’s largest financial institutions.
Founded in 1690, Barclays is a bank that offers a wide variety of different services to not only those in the United Kingdom, but many, many others globally. The company’s core service segments include personal banking, corporate banking, wealth management, and investment banking, like any other bank that has ever existed, generating revenues through taking deposits and making loans and charging higher rates on said loans (the spread between the inbound deposits and outbound loan amount being the profit), fees from service transactions, commissions through its brokerage and advisory divisions, and through trading on its own desk, trying to beat the market through its in-house talent.
While we will get into the company’s recent historical performance momentarily, I’d like to outline the current environment for a bank such as Barclays and also try to put some puzzle pieces together in terms of determining the highest likelihood outcome and performance over the next 18-24 months of the industry and the company’s businesses.
Rates are a big deal for banks, across the board, really, with some of the main rates of interest (pun intended) that come to mind being the federal funds rate, the London Interbank Offered Rate (LIBOR, or their fed funds rate), the personal consumption expenditures price index (PCEPI, a main inflation monitor), mortgage rates, GDP, debt:GDP, to list a few. With these rates in particular usually moving in tandem with one another (but this is far from being a hard and fast rule), and the fact that banks tend to benefit more from higher interest rates than lower ones (primarily due to the heightened borrowing costs for consumers and businesses, which means more margin to be had by a bank), and incorporating my opinion that the Fed is going to have to pivot and raise rates back up again in order to combat inflation, the next 18-24 months don’t appear all too grim for Barclays in the realm of rates.
While it might not apply all that much to a British bank than it would an American bank, President Trump’s upcoming second term is more than likely going to involve deregulation, and whenever there are talks of deregulation, those in banking, one of the world’s most historically regulated industries, all of the sudden become pretty excited.
When factoring in all of its divisions, such as its consumer bank, corporate (commercial) bank, investment bank, and private bank (wealth management), if rates come back up following my projected Fed pivot, its corporate division might experience some slowdown due to lessened loan demand, born out of smaller-to-medium-sized businesses not being able to grow their operations, focusing more on conserving their cash, which might also be the case for many other larger, better capitalized firms as well. Still, with higher rates being a boost for its margins, the loans that it is able to and does make by virtue of being as large as it is seems to be a net-positive, especially as it generally necessitates that Barclays focuses more on issuing to quality borrowers, lessening their risk while protecting margins.
With respect to the company’s consumer banking segment, higher interest rates could beef up its credit card and other consumer loan products, but the catch-22 here is that, if rates drift higher, this inherently leads to consumer default risk rising combined with a slowdown in consumer spending, which I will be discussing further later in this stock analysis article. In the investment banking realm, higher rates would likely mean less deal flow, with less transactions being done by companies (M&A and IPOs for example), but within its investment banking house is its aforementioned slew of trading desks, and more volatility in the market (again, as a result of heightened rates, not to sound like a broken record, but just trying to keep us on track), naturally means more opportunities in the markets, especially in the bond, currency and commodity markets.
In the frame of its wealth management segment, the picture is a little mixed in the sense that higher interest rates typically make savings and deposit accounts and associated products more attractive, leading to an influx of capital and business for Barclays, but the flip side is that the bond portfolio within its wealth management umbrella is likely to experience some level of decline, largely rooted in the relationship in which as interest rates (namely the fed funds rate) go up, bond prices go down, due to newly issued bonds being more attractive by offering higher yields, making the older, lower-yielding bonds less attractive.
In zooming out of the weeds momentarily, I’ll just acknowledge that one of the benefits of being as diversified as Barclays is that if one leg of the business isn’t pulling its weight due to external, macroeconomic headwinds, it can compensate through other divisions, and I’m glad to find that even during times of rising rates, it is my perspective that Barclays can feasibly prosper and continue performing at a meaningful rate. An example of this might be if loan demand decreases with higher rates, it can compensate through charging higher interest rates on the loans it does provide as well as through its trading desks, transaction fees from consumers and businesses, refinancing services offered to corporate clients, increased savings deposits due to providing higher rates, and higher interest rates on consumer loans and credit cards.
A positive here is that if I were to be completely off the mark, and rates continued declining, what it lacks in rate margins it will pick back up in advisory services, M&A through its investment banking chapter, and the wider pool filled with more consumers and businesses borrowing.
Nevertheless, my interest rate pivot conviction remains, though I remain open-minded.
One of the last things I’ll mention prior to getting into the numbers is that one shouldn’t forget that Barclays has quite a strong presence in the United Kingdom, and in accounting for this, a brief overview of the current and likely not-too-distant future outlay of the UK’s economy is in order.
Barclays maintains a strong presence in its retail and corporate banking segments in the UK, and when incorporating my previous notes regarding the effects of interest rates on consumer and commercial banking (i.e., individuals or companies taking out loans) and bringing the UK’s economic present and (more than likely) future into the frame, achieving GDP growth of 1% in 2024 (slightly better than previous forecasts), with inflation hanging out at around 2.2%, however (like the current US landscape), low unemployment can be associated with continued inflationary pressures, paired with other considerations such as the rising consumer confidence in the UK with US consumer spending sentiment showing some signs of caution (consumers tightening their budgets) due to persistent inflationary pressures.
With the forecast over the next 18-24 months in the UK being continued economic growth (1.2% in 2025) through continued interest rate cuts, which, if this was carried out as expected, would lead to further strengthening in the company’s consumer and business banking segments in the region, but again, if the Bank of England elects to pivot and raise rates a bit in order to further attempt to kill inflation in its tracks, the bank would still stand to benefit from higher rates on its loans, even if volume waned, among the other benefits I mentioned in previous paragraphs.
The present sentiment is that rates are going to continue coming down cautiously, but I am not so convinced that each regions’ respective central banks won’t have to pivot in early 2025, both in the context of the United States and the United Kingdom, especially with reference to the most recent November PCE figure (2.8%) in the United States, proving that inflation has undoubtedly not run its course.
In adding a smidge more in terms of company specifics, upon performing some more research I found that during its latest earnings call (Q3 2024), something that caught my attention was the bank incrementally increasing its risk exposure in order to boost its lending growth in the UK, particularly with respect to credit cards, mortgages, and commercial lending. The company has greater focus on increasing its mortgage volumes and has been actively acquiring new credit card customers, with the goal of gaining a stronger foothold in the personal unsecured lending spectrum but, again, the ultimate goal is growth in terms of volume but, more importantly, in my view, responsibly upping its net interest margin, given that these businesses tend to be higher margin in the first place. While one could reasonably view this as moving down a slippery slope, it doesn’t appear as though Barclays is being alarmingly irrational, irresponsible nor haphazard in these growth initiatives (will verify in the context of its liquidity later), but rather it is looking to grow slowly but surely, which is a positive for, again, such a large bank with such diversified global operations. Of course, throughout the rest of this stock analysis article I will be looking into the company’s books, pertinent ratios, among other indicators, so as to ensure that it has the financial capabilities to sensibly pursue such initiatives.
Also, while the Bank of England previously set itself up to pursue five rate cuts for the rest of 2024, it recently revised this outlook to only three rate cuts, being beneficial for a bank such as this one (at least in the short-term) since fewer rate cuts will likely lead to higher interest income since rates will be held a bit higher than if they would’ve been if rates were cut lower, in the five cuts scenario. Additionally, in recent history, many of its clients have been moving their funds from lower-rate to higher-rate deposit accounts, which isn’t necessarily the best for Barclays since it has to pay more through its higher-rate deposit accounts, thus putting a small dent in its net income margin, however, the silver lining here is that the rate at which this shift has been occurring has decelerated far more quickly than the company had expected, easing margin pressures.
In keeping all of this information in the back of our pockets, allow me to now walk through the financials driving Barclays and on a more standalone basis, whether or not this company’s stock (NYSE: BCS) presents a compelling case for investment.
Barclays’ stock financials
Barclays is a $48.06 billion company (according to its market capitalization) with a stock price of $12.96, a price-to-earnings (P/E) ratio of 9.52, and currently distributes an annual dividend of $0.4212 (specific enough?) to its shareholders, all initially telling me that this company’s stock (NYSE: BCS) appears relatively cheap compared to its fair value, particularly when employing the commonly held fair value benchmark of 20, as this bank’s P/E ratio is a ways away from 20, thankfully towards the downside, indicating that its shares are undervalued.
Still, I’ve been moving away from letting mere single metrics and ratios dictate my investment processes or forward-looking perspectives, as I’d love to live in a black and white world, but we just don’t nor ever will, and price-to-earnings, the black and white metric it is, provides some guidance, but hardly any definitive substance, in my humble opinion.
Thus, my focus on cycles, the future, and where it is going to lead asset prices.
Still, this supplemental information doesn’t hurt.
In the pursuit of gaining more information on this company and its true financial health, I direct you towards Barclays’ balance sheet, where its executives are at the helm of $1.88 trillion (yeah, you read that correctly) in total assets along with just under $1.8 trillion in terms of total liabilities, which may seem like a wild amount (it sort of is), but when contextualizing this amount with other gargantuan financial institutions that I’ve analyzed previously, this clearly comes with the territory. What should, in my opinion, be of greater interest is what can be found deeper within these figures, such as the fact that Barclays has a strong liquidity position, with around $128 billion (as of late March 2023) above the minimum regulatory liquidity requirements, along with quite a small amount of nonperforming loans on its books, and a strong return on tangible equity (RoTE) of 10.6%, all largely thanks to its diversified operational base but also its staunch risk management parameters and effective standards.
When peering over to the income statement, it can be found that over the years, Barclays’ annual revenues starting from 2019 haven’t painted a very volatile picture, but it can still be said that like any other global bank, it maintains its fair share of sensitivities with respect to the macroeconomy, and COVID was hardly any big bank’s favorite season, and there have been some other economic highs and lows globally, but Barclays faired net-positively between and during 2019 and 2023.
Specifically, its revenues ranged between a relative low of $9.9 billion (2021, or COVID, of course) and a high of $16.1 billion, as reported at the end of 2023, and I’d like to point out that in all other years within this timeframe, Barclays’ revenues stayed at around $12 billion, begging the question of why the company’s revenue increased substantially between 2022 and 2023.
The reason lies within its strong growth in net interest income (NII), driven by a basket of factors, including higher interest rates (this is the main driver), along with other recent boons such as internal growth within its UK divisions (predominantly due to higher net interest income but also added income through its structured hedging strategies), and the solid performance within its corporate (commercial) banking division, driven predominantly by transactions.
Like I said, higher interest rates will do any bank good through fattening its margins, and it clearly had an excellent impact on the company in question, with the bulk of its revenues being derived from interest income (again, like practically any other bank), and rates just happened to be moving in the right direction (pushing the company’s NII up 20% year-over-year (YOY) between 2022 and 2023), but it doesn’t matter what has happened in the past, but what is the most likely scenario, or set of scenarios moving forward.
Thankfully, given my analysis (which, like anyone’s forward-looking analysis, is susceptible to being wrong, just trying to exude a little humility here), all of the Fed’s ducks are aligning in a way that leads me to believe rates are going to have to come back up in order to thwart the persistent inflationary pressures faced by consumers both in the United States as well as the United Kingdom, and the other secondary geographies served by Barclays. If I’m right, and the Fed has waved the victory flag too early and rates still have to go up before they stay down for the foreseeable future, Barclays is set to benefit from the continued inflation battle.
On the cash flow side of things, the bank’s total cash from operations (also referencing during 2019 and 2023) displayed a bit of volatility, starting out at generally trending southbound from a relative high of $78.6 billion in 2020 to its most recently reported figure, a low of -$1.18 billion (2023). In doing some more research into the matter, it appears as though Barclays was enduring a few different transformational changes, some more temporary than others. Specifically, the company incurred restructuring costs in the amount of approximately $1.13 billion through its cost-cutting initiatives in Q4 2023, and also experienced elevated credit impairment charges, amounting to just about $2.38 billion, due to higher delinquencies in credit card accounts in the United States in 2023, and it also implemented a significant operational overhaul, with me personally deeming most of these as being worthy causes for some volatility in the cash from ops department.
However, regarding the personal unsecured loan delinquencies in the United States, which are an initial point of concern, this was likely caused by a culmination of a few different factors, some of the largest being inflationary pressures imposed on consumers, or just frankly irresponsible consumers engaging in bad behaviors and leaning into worse habits, which the world is unfortunately going to be filed with until the rest of time.
Perhaps that’s just the ultra-realist in me, but you know I’m right.
The main thing here that potential shareholders should want to see over the next couple of years is tighter credit standards coming out of Barclays, but again, if there’s any solace to be had, it is the fact that this bank has many revenue drivers and for the time being, from a purely objective, investment-based perspective, if the company has the reserves and financial firepower to assume a little more risk (and I really do only mean just a little) and gain from charging higher rates for providing this service, who am I to judge? Additionally, it is important to note that Barclays has a solid history of risk assessment, upholding a track record of employing advanced methodologies including stress testing, scenario and sensitivity analysis, which is on full display through its low level of problem loans, composed of only 2.5% of gross loans.
Although Barclays, like any other bank, isn’t bulletproof, as it is a bank’s very job to assume risk, I am comfortable when putting the facts together at the moment in that this firm has the right parameters and mechanisms in place to protect itself, again, also benefiting from being such a diversified financial institution.
Barclays’ stock fundamentals
In terms of its most recent report, Barclays has a net profit margin of 27.9% (reported for fiscal year ‘23), which, compared to some of its highly competitive counterparts such as JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup, which respectively maintained net profit margins of around 30%, 26%, 23%, and 14%, is not bad at all, speaking to the bank’s strong positioning in terms of cost and risk management, overall business diversification and the host of revenue streams that follow, which I presently remain even more bullish on, given my previous comments relating to rates and how it is my opinion that the Fed is going to have to pivot into higher rates sooner rather than later, further fattening bank margins as a result.
Should you buy Barclays stock?
On the basis of some of the company’s main figures alone, there is a lot to like about Barclays. Primarily, its shares are trading at favorable valuation levels (based off of its present price-to-earnings ratio), the liquidity found within its balance sheet is comforting, its revenues have been moving northbound quite nicely over the last handful of years (and more importantly, I don’t presume this will stop in 2025, given my harped-upon Fed pivot, rate thesis), and I am really a fan of the concrete, value accretive steps Barclays is taking in order to responsibly boost its net interest income and fine-tune things internally so as to optimize its business operations and pave an even stronger path moving forward.
One shouldn’t forget that its recent credit card delinquencies in the United States have been a sore spot, but understanding this company’s overall liquidity framework is just as important, leaving me watchful but not petrified regarding the risks it is assuming for the time being.
In my books, Barclays gets a “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
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