FTSE 100

Is the Barclays share price undervalued?

Could the Barclays share price (LON: BARC) offer good value for money relative to the wider FTSE 100 index?

Over the past year the Barclays share price (LON: BARC) has risen by around 83%. By contrast, the FTSE 100 index (INDEXFTSE: UKX) has gained 17% over the same period. This represents a 66 percentage point outperformance from the bank’s shares.

Despite this, Barclays shares continue to trade on what appears to be a low valuation compared to the wider index. They currently have a forward price-earnings ratio of approximately 6.5. In an era where double-digit price-earnings ratios have seemingly become the norm, this could make Barclays a relatively cheap share.

An uncertain future for the Barclays share price?

Of course, the Barclays share price could face a relatively uncertain future. The UK and world economies face a wide range of ‘known-unknowns’ at the present time. Notably, inflation has pushed to levels last seen over a decade ago in the US and in Europe. This could prompt higher interest rates, although central bankers have previously said they believe higher inflation is likely to be temporary due to the effects of economic reopening following Covid-19 lockdown measures.

Rising interest rates could be good news for banks such as Barclays. As ever, banks rely to a significant extent on their net interest margin, which is essentially the difference between the interest rate they pay depositors and the interest rate they charge borrowers. Low interest rates, such as those present today, provide more limited scope to obtain a generous net interest margin. As such, rising inflation that prompts higher interest rates could be good news for the banking sector on the one hand.

However, such a situation could also have unintended consequences. Rising interest rates may dampen the world’s post-Covid economic recovery. This may increase default rates and reduce demand for new loans, thereby likely harming profitability and investor sentiment across the banking sector. As such, the future for the Barclays share price may continue to be relatively uncertain in the coming months.

Stock price valuation

In my view, the bank’s recent half-year results showed a solid performance that highlighted the benefits of its relatively diverse business model. It continues to target a cost:efficiency ratio under 60% and a return on tangible equity in the double-digits for the current financial year.

Clearly, its performance is likely to be affected by the economic environment in which it is operating. At present, this appears to be extremely difficult to accurately predict. However, with a relatively low price-earnings ratio, Barclays’ share price appears to include a wide margin of safety in case operating conditions worsen over the coming months.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

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