Over the past 12 months, the Barclays (LSE: BARC) share price has fallen a staggering 19%. After this decline, value hunters might be interested in buying the stock as it looks cheap compared to history.
However, before buying into the bank, there are some things investors should know.
Barclays share price falling
The Barclays share price has fallen this year as investor sentiment towards the banking sector has deteriorated. Lenders, such as Barclays, are preparing for billions in loan losses as a result of the coronavirus crisis. These defaults could weigh on profits for many years to come.
Unlike many of its peers, Barclays has been able to sidestep the worse of these losses. Its recent trading updated noted that while loan impairments have risen, so have the group’s trading profits at its investment bank.
For the second quarter, the company booked a 49% jump in trading income, as the investment bank benefited from turbulent markets. This helped the wider group avoid a loss in the second quarter, providing some relief to the Barclays share price. It reported a net profit of just £90m, including £1.4bn of loan loss provisions.
In total, the bank is now expecting £3.7bn of loan impairments as a result of the crisis. This is just a guide at this stage. The final figure may be much higher, or lower, depending on how long the crisis lasts.
Clearly, the group is facing an uncertain few months. If the pandemic lasts into 2021, the lender may be forced to take even more loss provisions. This may impact the Barclays share price.
Still, the group should be able to cope with these issues. Its capital position is strong, and income from its investment bank is helping it stay in the black. This has proved the benefits of diversification over the past few months.
As such, the bank seems well-placed to profit from the UK economic recovery when it begins. The lender’s balance sheet should help it through the crisis. It can then use its size and diversification to take advantage of opportunities in the recovery. Using this approach should lead to improved investor sentiment towards the Barclays share price.
This suggests investors may profit from buying into the lender’s share price while it trades at a low level. Indeed, at the time of writing, the Barclays share price looks cheap.
The stock is dealing at a price-to-book (P/B) value of 0.3, which suggests it offers a wide margin of safety at current levels. The banking sector average P/E is around 0.6, implying the stock could potentially double from current levels.
The bottom line
All in all, the Barclays share price has fallen this year due to concerns about the company’s near-term outlook. However, investors should look past this short-term uncertainty and concentrate on the lender’s long-term potential. From this perspective, the stock looks cheap.
Therefore, now may be a good time to snap up the Barclays share price as part of a diversified portfolio while it offers a wide margin of safety.
The post Tempted by the Barclays share price? Here’s what you need to know appeared first on The Motley Fool UK.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Barclays. 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 2020