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Is the Barclays share price the FTSE 100’s greatest bargain?

Shot of an young Indian businesswoman sitting alone in the office at night and using a digital tablet
Image source: Getty Images

The Barclays (LSE:BARC) share price has shot higher at the beginning of 2023. Yet at the current price of 176.3p, the FTSE 100 bank still offers terrific all-round value, at least on paper.

Barclays shares trade on a forward price-to-earnings (P/E) ratio of 5.4 times, well below the average of 13.5 times for FTSE index shares.

That’s also below the earnings multiples of the London Stock Exchange’s other major banks, as the table below shows.

FTSE 100 stock

Forward P/E ratio

Lloyds Banking Group

6.5 times

NatWest Group

6.3 times

HSBC Holdings

6.7 times

Standard Chartered

7.3 times

On top of this, Barclays shares also seem to offer excellent value in terms of income. A solid dividend yield of 5% for 2023 marches to 6% for next year. Both figures are far above the current 3.7% FTSE 100 average.

Is Barclays’ share price too cheap to miss? And can the bank continue climbing in 2023?

Rates boost

Rising interest rates have been a drag on global stock markets over the past year. But higher base rates have been good for the banks. They’ve widened the margins between the rates these businesses offer to savers and to loan customers.

Encouragingly for Barclays et al, interest rates are tipped to keep rising too. Markets expect policy setters to hike the benchmark to 4.5% later this year, up a full percentage point from current levels.

Rates could remain higher for longer as well if the Bank of England chief economist’s inflation warnings prove correct. Huw Pill said this week that inflationary pressures could “prove more persistent” due to a tight labour market and supply chain issues.

Bad loan blues

Having said that, the benefit brought by rate rises could continue to be offset by soaring loan impairments.

Barclays swallowed £722m worth of credit impairment charges in the nine months to September. This in turn caused pre-tax profits to fall 16% from a year earlier, to £5.7bn. Bad loans could steadily increase too if economist predictions of a recession lasting deep into 2024 come true.

I’m particularly concerned about a rapid surge in mortgage defaults as the cost-of-living crisis drags on. The Financial Conduct Authority has predicted that as many as 770,000 people are at risk of mortgage default during the next two years.

This is a particular danger to Barclays given its position as one of Britain’s largest mortgage providers (it was the fifth largest provider of home loans in 2021, according to UK Finance).

The verdict

As I say, the Barclays share price looks cheap on paper. But in my opinion, its low valuation reflects the high profit risks it faces in the near term and beyond.

Profits could slump in 2023 and 2024 as the UK economy splutters. And the rapid rise of digital and challenger banks provides another obstacle for the bank to overcome. On balance I’d rather buy other cheap FTSE 100 stocks right now

The post Is the Barclays share price the FTSE 100’s greatest bargain? appeared first on The Motley Fool UK.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc, and Standard Chartered Plc. 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 2023