Barclays (LSE:BARC) shares have rebounded slightly since the March correction engendered by the failure of Silicon Valley Bank (SVB), as well as the implosion and takeover of Credit Suisse.
The banking giant is due to report its earnings for the last quarter on Thursday. So it could be little risky to underline my confidence in the bank today. However, the broad consensus is, despite a fairly eventful quarter for the sector, that not much will have changed.
Let’s take a closer look.
A multibillion-pound tailwind
Interest rates steadily increased during 2022 and have continued pushing upwards in 2023. In fact, after inflation came in stickier than some anticipated last week, there may even be more rate rises this year, before rates fall in the medium term.
For banks, this is a huge change versus the last decade during which interest rates were near zero.
Higher interest rates mean higher net interest margins. This is because banks imperfectly pass on higher lending rates to savings customers. And in the near term, this is where Barclays will see revenues rise significantly.
But there’s a hedging strategy too. These interest rates won’t last for forever, but Barclays will be selling fixed interest loans with higher yields and will be buying government debt with higher yields. Collectively, activities like this extend the interest rate tailwind.
How big is this tailwind? It’s hard to tell. Some analysts have suggested it could be worth £5bn in incremental revenues by 2025.
There’s also the matter of interest accrued on central bank deposits. Income on eligible assets held as central bank reserves should be soaring.
Why buy more?
There are naturally challenges with higher interest rates. First among them is bad debt. When interest rates push higher, repayments increase. And this can be an issue as many businesses and individuals will struggle with these higher repayments.
Impairment charges have risen considerably over the past 12 months and this is a challenge if rates push higher. Moreover, higher interest rates tend to put new customers off borrowing and, as such, impact loan book growth.
We may also see some weakness from the investment arm of the business. The first three months of the year saw plenty of market volatility. Sometimes that’s good for investment business, sometimes it’s not. But the quarter largely ended on a slow after the SVB fiasco.
However, I think all the above factors are broadly priced in. The company trades at just five times earnings, offering an impressive 4.7% dividend yield.
In fact, you can’t find many cheaper shares on the FTSE 100. And a discounted cash flow analysis suggests the stock could be undervalued by as much as 70%.
So why am I buying more? It’s undervalued, it’s got strong liquidity, and net interest income is surging. But I’m also buying for when interest rates moderate to 2-3%. Because that’s where we see impairment charges fall.
The post A multibillion-pound reason to buy Barclays shares! appeared first on The Motley Fool UK.
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James Fox has positions in Barclays Plc. The Motley Fool UK has recommended Barclays 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.
