Down 20%, are Barclays shares a bargain or a value trap?

Barclays (LSE: BARC) shares have been a long-term disappointment. Viewed over a 15-year period, they have destroyed shareholder wealth. But in a rising interest rate environment, bank stocks are once again looking like a more attractive proposition. So, should I invest today?

Banking crisis 2.0?

The collapse of several US and European banks has fueled fears of another financial crisis. However, the parallels with 2008 may have been overdone.

The global financial crisis is largely a credit event. The banking industry makes bad loans that then fail. Today, the problem is very different.

Banks’ balance sheets are more heavily weighted towards safe securities, such as US Treasuries. Most of these are bought with high prices and low yields. This is not a problem as long as interest rates remain low.

An unprecedented rate hike in 2022 sent 10-year Treasury bond yields up. As a result, bond prices fell sharply.

In the case of well-capitalized banks, like Barclays, this is not a problem. Holding to maturity means you will get a bank of money.

Silicon Valley Bank was not so lucky. Poor risk management means that a disproportionate number of depositors are not insured. The next step in the bank is obviously forced to sell Treasury holdings, realizing large losses.

Various banks

One of Barclays’ main attractions for me is its diversified business model. This is very different from many competitors, especially Lloyds.

By 2022, all three operating divisions are expected to generate a double return on real equity. Retail banking operations in the UK generated net interest income of 3.2%, due to rising interest rates.

Strong growth in consumer cards and payments in the US and UK, driving revenue up 46%, year-on-year.

In contrast to 2021, falling share prices, along with low merger and acquisition (M&A) activity, have benefited investment banking. However, it has gained 114bps since 2019.

Should I buy Barclays?

Any investment in Barclays is predicated on where I believe the likely trajectory of the economy is going.

At the moment the economy seems to be rebounding. Unemployment is low and inflation is expected to fall. However, the number of job openings here and in the U.S. increases the demand for wages. If the spiral of wage prices becomes entrenched in the economy, we can see a repeat of the same situation in the 1970s.

One sector that is particularly sensitive to high interest rates is the technology sector. And this is important for Barclays.

Its investment banking arm relies heavily on a steady stream of IPOs and M&A activity. However, if interest rates remain elevated for some time, such work is likely to dry up. After all, it is more difficult for unprofitable startups to raise capital on the stock market in such an environment.

If we go into a full recession, Barclays’ share price could nosedive. Even if I’m wrong, I still believe there are better opportunities elsewhere right now.