I don’t put much faith in brokers’ recommendations, but I can’t help noticing their bullishness towards the FTSE 100‘s big banks.
Lloyds Banking Group and Royal Bank of Scotland are both attracting a pretty strong buy consensus, as is Barclays (LSE: BARC), which is in the news for misbehaviour yet again.
Whistleblowing
Barclays was fined $15m this week by the New York State Department of Financial Services (DFS), after chief executive Jes Staley had tried to identify a whistleblower in the bank. Mr Staley himself had earlier been hit with a UK fine of £642,000 for the same offence, and had £500,000 sliced off his bonus by Barclays.
It stems from a couple of anonymous letters written in 2016, questioning the fitness of an executive hired by Mr Staley, after which he set the bank’s head of security on the trail of the suspect.
The DFS spoke of “actions at the top that exposed the bank to risk and created an atmosphere in which employees might doubt that it was safe to escalate issues of concern to the bank.”
The fine is small compared to the Libor-fixing penalty faced by Barclays in 2015, and the markets shrugged it off. The shares picked up a fraction of a percent on the day of the news, largely in line with the slight upward movement of the FTSE 100.
Slump
But the Barclays share price remains in a slump, as the UK government’s Brexit approach is looking increasingly like aBarnum & Bailey performance. While the FTSE 100 has lost 11.5% so far in 2018, Barclays shares have shed 25%.
On the valuation front, that now puts them on a forward P/E of only around seven — approximately half the Footsie’s long-term average. Forecast dividend yields are also now up to 4.1% this year and 5% next, with three times cover by earnings being around the best in the sector.
But when shares look obviously cheap, I always ask myself what I’m missing, and two of my Motley Fool colleagues are bearish about Barclays right now.
Downsides
Royston Wild correctly predicted the end-of-year resumption of the Barclays share price slide, and he points out (quite rightly) that the UK economy is pretty much certain to suffer whichever way Brexit goes — and if it’s a no-deal scenario, things could turn out especially bad.
He also points to the relative weakness of Barclays’ balance sheet under worst-case stress tests, and that is a genuine cause for concern too.
Kevin Godbold also sees too much risk at the bank, pointing to the value-trap characteristics that have plagued it for the past decade. He also voices fears that we could be at a cyclical high point, and that falls in earnings over the next few years could see the current alleged undervaluation being eliminated.
Valuation
I don’t disagree, and I think both of my fellow Fools have correctly identified genuine risks for Barclays shareholders.
But I just can’t help thinking that Barclays shares are currently valued as if all of the worse-case scenarios will come to pass: that a no-deal Brexit will kill the economy, and that a big crunch will test Barclays’ balance sheet again. And I’m just not that pessimistic.
But I think I’d hold off until I see how Brexit is going in the New Year.
