Are there any scarier shares on the FTSE 100 to buy today than Royal Bank of Scotland (LSE: RBS) and Barclays (LSE: BARC)?
There’s plenty of contenders out there. Sainsbury’s and Centrica, for instance, firms which continue to lose customers to their rivals at a rate of knots. Imperial Brands and British American Tobacco becase of the shocking demand decline in the cigarette market. How about shopping centre operators Land Securities and British Land which are being battered by falling consumer confidence and the e-commerce explosion?
You’re bound to have your own opinion, but I don’t think it can be denied that Barclays and RBS are in one heck of a pickle right now, as reflected by their chubby share price falls over the past year. And I reckon the banks can expect to plummet again at the beginning of next month.
I see the bad loans rising
First-half results from Barclays are slated for release on 1 August , and corresponding financials from RBS are expected the day after. If the last set of results from both are anything to go by then shareholders should probably find something to bite down on.
It’s clear uncertainty over the UK’s future relationship with the European Union is really starting to have an impact on the domestic economy now. Business is peering over the Brexit precipice and it doesn’t like what it sees, causing consumer confidence to sink and cross-sector activity to slump.
This was abundantly apparent in all of the banks’ first-quarter updates, releases in which RBS reported an 8% revenues drop and Barclays printed a 2% reversal. More worryingly for the former though, was the jaw-dropping 64% leap in bad loans in the period, a figure that beat its blue-chip rival’s own 56% impairment increase by a nose.
Economic conditions have worsened since then, as illustrated by key industry gauges like services PMI stagnating, manufacturing activity sinking at the fastest rate for years, and some retail sales surveys plunging to all-time lows. And this means August’s first-half releases from the banking giants are likely to be even worse.
Will things get even worse?
Even before the problems surrounding European Union withdrawal materialised, profits growth over at Barclays et al was being hampered despite robust economic conditions in the UK. Why? An environment of low interest rates, that’s why.
But with the prospect of a no-deal Brexit comes the possibility of benchmark rates going even lower. Bank of England official Gertjan Vlieghe told Reuters late last week that he would vote to hack them to “close to 0%” in such a scenario.
So forget about Barclays’s and RBS’s rock-bottom P/E ratios of below 10 times. I say the tough trading conditions of right now may, in retrospect, look like a cakewalk compared to what happens if a disorderly Brexit does indeed transpire.
They may be cheap but they’re cheap for a reason. And I fully expect their share prices to keep sliding in the near term and beyond.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, British Land Co, Imperial Brands, and Landsec. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019