Can Barclays shares be a source of second income?

On the back of a disappointing set of full year results, Barclays (LSE:BARC) shares are down almost 10%. However, the recent decline could present a buying opportunity for passive income seekers.

Have their wings clipped

Like other high street banks, Barclays is expected to perform well in 2022 due to higher interest rates. This is the highest case, as the total income increased by 14%. However, a number of factors offset those gains, leading to a decline in net profit, so Barclays shares took a dive.

First, the investment banking division was shut down in 2022, as financial markets collapsed. This is the main reason for the decrease in ROTE. Second, higher impairment charges force Blue Eagle banks to set aside more profits to cover bad loans. And to make matters worse, Barclays has indicated that it will have to set aside an additional £1.59bn for litigation costs, which will have a further impact.

Dovish prospects?

Despite the negatives, the lender still increased its dividend by 21%, to the delight of passive income investors. And to make it even sweeter, it also announced plans for another £0.5bn share buyback programme, increasing shareholder value. This makes a solid case for investing in Barclays shares for passive income and growth potential.

After all, the company is guiding for a better 2023. The conglomerate expects a higher net interest margin of 3.2%, while targeting at least a 10% ROTE. As such, analysts are predicting forward dividend yields of 5.1% and 5.9% over the next two years.

Finding the balance

However, it is worth noting that such a strong forecast will be strongly determined by the health of the economy, as well as the outlook for interest rates going forward.

On the one hand, the easing of rates can see a rebound in investment banking activity. This will give a big boost to your overall income. However, Barclays will also see net interest margins fall, which could affect lucrative payouts. On the other hand, higher rates will allow the group to continue to accumulate net interest income without fees. But this will result in higher disability costs.

Either way, investing in Barclays shares is not a bad idea to generate a second source of income. The payout is also guaranteed at 4.2 times, and the CET1 ratio (which compares the bank’s capital to assets) remains strong. Therefore, it is not surprising to see JP Morgan, Citiand Goldman Sachs all have a bullish rating on the stock, with an average price target of £2.46. This gives a rise of 42% from the current level.

Multiples are cheap, and definitely have passive income potential. That said, issues consistent with these laws are untenable and add uncertainty to the bottom line and future shareholder returns. Even so, I think the stock looks too cheap to be worth considering at current levels, and that’s why I’m going to initiate a position.