Despite its cheap share price and market-beating dividend yield, Barclays (LSE: BARC) is a FTSE 100 share I’m happy to continue avoiding ahead of what appears to be another year of intense pressure for the UK economy.
I recently explained why Lloyds could struggle in an environment of persistent Brexit uncertainty, low interest rates, and massive competition – factors which are already playing havoc with the likes of Barclays. Third-quarter financials showed revenues fall 2% and bad loans rise by more than half a billion pounds. And if recent insolvency data can be believed things threaten to get a lot worse in 2020.
According to the Insolvency Service there were a colossal 30,879 personal insolvencies spanning England and Wales between July and September, up 23% year on year. Should the number of filings continue at the current rate the total for 2019 will be the highest for nine years. Corporate insolvencies, meanwhile, rose 1.6% to 4,355.
So you can forgive me for thinking that City analysts and their forecasts of a 15% earnings rise at Barclays in 2020 are looking a little bit too giddy. But you don’t just have to take my word for it as the boffins over at Moody’s also reckon the sky is looking pretty dark for Britain’s banks over the next year.
Earlier this week the ratings agency downgraded its view on the entire domestic banking sector to negative from stable, noting that “the UK’s economy is weakening, making it more susceptible to shocks, and prolonged uncertainty over Brexit has reduced the country’s growth prospects.” Moody’s expects GDP growth in the UK to slow from 1.2% this year to 1% in both 2020 and 2021.
The agency added that “persistently low interest rates” and “increased mortgage market competition… eroding the net interest margins of most UK lenders” will provide extra hurdles for Barclays et al next year. It said that “these challenges will outweigh the sector’s strong capital and liquidity buffers, and an expected decline in banks’ conduct costs”, while these firms will also likely have to battle a rise in so-called “problem loans.”
Too much risk!
Now Barclays is cheap, with the banking giant trading on a forward price-to-earnings ratio of 7.1 times, which trails the broader FTSE 100 of around 14-and-a-half times by a long chalk. What’s more, a dividend yield of 5.8% for next year also smashes the corresponding blue-chip average of 4.8%. But despite these appealing valuations I’m still not prepared to spend my hard-earned cash on the business.
As I say, the growing stormclouds over the UK economy mean that Barclays is in danger by missing City growth estimates by quite a distance. And what’s more, its worrying profits outlook and below-target capital buffer cause me to doubt broker expectations of another meaty dividend hike in 2020.
All in all, I think the bank offers up too much risk to be considered a sensible stock market investment today.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. 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