Is the Barclays share price the FTSE 100’s greatest bargain?

At Barclays (LSE:BARC) share price in 2023. But at the current price of 176.3p, the FTSE 100 The bank still offers good all-round value, at least on paper.

Barclays shares trade on a forward price-to-earnings (P/E) ratio of 5.4 times, well below the 13.5 times average for FTSE index shares.

That is also below the earnings multiple of London Stock Exchange‘s other major banks, as the Table below shows.

On top of this, Barclays shares also appear to offer good value in terms of earnings. Solid dividend yield of 5% for 2023 to 6% for next year. Both figures are higher than the current FTSE 100 average of 3.7%.

Is the Barclays share price too cheap? And can the bank continue to rise in 2023?

Rates are increasing

Rising interest rates have been a drag on global stock markets over the past year. But higher base rates have been good for banks. They have widened the margin between the rates offered by this business to savers and to loan customers.

Encouragingly for Barclays et al, interest rates are tipped to keep rising too. Markets expect policymakers to raise the benchmark to 4.5% by the end of this year, up a full percentage point from current levels.

Rates could remain unchanged even if the Bank of England chief economist’s inflation warnings prove correct. Huw Pill said this week that inflationary pressures could “proved more persistent” due to the tight labor market and supply chain issues.

Bad loan blues

Having said that, the benefits arising from rate hikes could continue to be offset by rising debt.

Barclays swallowed £722m worth of credit impairment charges in the nine months to September. This led to a 16% drop in pre-tax profit from the previous year, to £5.7bn. Bad loans may increase if economic predictions of a recession lasting until 2024 come true.

I am deeply concerned about the rapid rise in mortgage defaults as the cost of living crisis continues. The Financial Conduct Authority has predicted that 770,000 people are at risk of defaulting on their mortgage over the next two years.

This is a particular danger for Barclays given its position as one of Britain’s largest mortgage providers (it is the fifth largest provider of home loans by 2021, according to UK Finance).

Verdict

As I say, the Barclays share price looks cheap on paper. But in my opinion, the low price reflects the risk of high profits that we face in the near term and beyond.

Profits could fall in 2023 and 2024 as the UK economy picks up. And rapidly digital banks and challengers are presenting yet another obstacle for banks to overcome. On balance I’d rather buy another cheap FTSE 100 stock right now