Barclays (LSE:BARC) has been one of many FTSE 100‘s greatest performing shares in 2024. Boosted by hopes of rate of interest cuts, the banking large has seen its share price soar 50% within the 12 months so far.

Buyers could also be temped to assume that its famously-low valuation has soared because of this. However a fast look at dealer forecasts reveals that the other’s true.

Low-cost on paper

At 229.4p per share, Barclays’ share price trades on a ahead price-to-earnings (P/E) ratio of seven.3 instances. This makes it cheaper than excessive road rivals Lloyds (9.2 instances) and NatWest (8.1 instances).

On high of this, the financial institution trades on a ahead price-to-earnings progress (PEG) ratio of 0.6. Any studying under 1 means that an organization is undervalued.

Development forecasts are primarily based on predictions that earnings will soar 13% 12 months on 12 months in 2024. Analysts assume decrease charges will enhance backside strains throughout the banking trade. And so they imagine Barclays’ earnings will obtain an additional enhance from its ongoing profitable cost-cutting drive.

2 causes to keep away from Barclays

That being mentioned, I nonetheless have reservations about Barclays’ progress trajectory, and so proceed to keep away from the financial institution regardless of the cheapness of its shares.

It’s my opinion that its low valuation displays the excessive dangers it nonetheless poses to traders. Listed here are simply two causes I’m not tempted to take a position.

Rate of interest questions

Excessive rates of interest have benefits and drawbacks for banks. They enhance the distinction between the curiosity they cost debtors and provide financial savings which, in flip, provides their web curiosity margins (NIMs) a shot within the arm.

Nevertheless, elevated rates of interest may considerably sap mortgage progress and push credit score impairments greater. At Barclays, loans and advances slipped 1% 12 months on 12 months within the first quarter of 2024. Dangerous loans remained broadly steady, however have been nonetheless important at round half a billion kilos.

The issue for banks is that rates of interest could stay greater for longer than the market has priced in nevertheless. The IMF, for example, has simply warned that “additional challenges to disinflation in superior economies might power central banks… to maintain borrowing prices greater for even longer“.

Companies battle

The prospect of higher-for-longer charges is very regarding given the mounting pressures on small companies. Barclays’ rising impairments have been pushed mainly by US card prospects in latest instances. The hazard is that the variety of unhealthy loans might be about to soar elsewhere too.

It is because the financial institution’s the UK’s largest supplier of small-and-medium enterprise (SME) loans. With the economic system struggling, the stress on these corporations is very extreme.

Insolvency specialist Begbies Traynor says the variety of British companies in ‘significant’ monetary misery leapt 8.5% within the second quarter. In the meantime, the quantity in ‘critical’ monetary misery rose 1.1%. Smaller corporations are particularly weak within the present local weather.

The decision

The FTSE 100 stays full of nice worth shares following years of underperformance. However these dangers above — mixed with the longer-term risk of rising competitors — make Barclays an inexpensive inventory I’m eager to keep away from.