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Barclays’ (LSE: BARC) share price has fallen 7% from its 3 March 12-month traded high of £3.15.
This has been caused mainly by two key factors, in my view. The first was the decline in UK interest rates, which is broadly negative for banks’ net interest income (NII). This is money made from the different rates charged and loans and paid on deposits.
The second was the heightened risk of a US-led global recession following the imposition of tariffs on 2 April. Banks generally reflect the economic health of the countries in which they operate, both through private and business accounts.
As a longtime private investor, I look past shorter-term factors driving markets. Instead I focus on the prospects for stocks over the long term. Aged over 50 now, this time horizon has decreased from the 30 years it once was. But it still allows me to concentrate on stock fundamentals rather than market noise.
So, should I buy Barclays for the long term?
Is the business solid?
A risk for Barclays would emerge if interest rates in its key markets kept falling and remained low for many years. Another would be an enduring global financial crisis like that which began in 2007. Both could damage the bank’s income streams and capital base over time.
However, analysts forecast that Barclays’ earnings will increase 8.9% to end-2027. It is growth here that drives any firm’s share price and dividend in the long term.
A positive for me on the interest-rate factor is that the bank has shifted to a fee-based income model rather than an interest-based one.
In 2024 its income increased 6% year on year to £26.788bn while its profit before tax jumped 24% to £8.108bn. Its fee-based income from investment banking climbed 7% to £11.805bn. And fee-based income from private banking and wealth management increased 8% to £1.309bn.
On the recession factor, the average length of a US-led downturn since 1945 is around 10 months, according to the National Bureau of Economic Research.
Are the shares undervalued?
Barclays’ 7.9 price-to-earnings ratio is bottom of its peer group, which averages 9.5. These banks include HSBC at 8.6, NatWest at 8.7, Standard Chartered at 9.5, and Lloyds at 11.2.
It is also the laggard on the price-to-book ratio at 0.6 compared to a competitor average of 0.9. And the same applies to its 1.6 price-to-sales ratio against a 2.4 average for its peers.
I ran a discounted cash flow (DCF) analysis to put these numbers into share price terms. Using other analysts’ figures and my own, the Barclays’ DCF shows it is 63% undervalued at its current £2.79 price.
Therefore, the fair value for the shares is £7.54, although market unpredictability could move them lower or higher.
Is now the right time for me to buy?
I am at the latter part of my investment cycle and am focused on stocks that pay very high yields. I intend to increasingly live off the income from these while reducing my working commitments.
Barclays’ yield is just 2.9% which is below the minimum 7% I want, so I will not buy the stock.
However, if I were even 10 years younger and not focused on high-yield shares then I would buy it for its strong earnings prospects and believe investors should consider it.
