Should You Be Concerned About Barclays PLC’s (LON:BARC) Risk Exposure?

With a UK£28.7b market capitalisation, Barclays PLC (LON:BARC) falls in the large, commercial bank category. A common risk large financial institutions face is credit risk, measured by the level of bad debt it writes off. During the GFC, large banks with risky lending portfolios exposed to the volatile credit market lost billions of dollars’ worth of shareholder equity. This led to investors losing trust in these once stable financial stocks. Now we will analyse financial metrics focused on bad debt and liabilities in order to gain insights into Barclays’s lending practices and better understand its operational risks.

Check out our latest analysis for Barclays

LSE:BARC Historical Debt October 11th 18
LSE:BARC Historical Debt October 11th 18

How Much Risk Is Too Much?

If Barclays does not engage in overly risky lending practices, it is considered to be in good financial shape. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. With a ratio of 2.58%, the bank faces an appropriate level of bad loan, indicating prudent management and an industry-average risk of default.

How Good Is Barclays At Forecasting Its Risks?

Barclays’s ability to forecast and provision for its bad loans relatively accurately indicates it has a good understanding of the level of risk it is taking on. The bank has poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does Barclays understand the risks it has taken on? Barclays’s low bad loan to bad debt ratio of 81.91% means the bank has under-provisioned by -18.09%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.

How Big Is Barclays’s Safety Net?

Handing Money Transparent Barclays makes money by lending out its various forms of borrowings. Deposits from its customers tends to bear the lowest risk since the amount available and interest rate paid are less volatile. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Barclays’s total deposit level of 36% of its total liabilities is below the sensible margin for for financial institutions which generally has a ratio of 50%. This means the bank’s safer form of borrowing makes up less than half of its liabilities, indicating riskier operational activity.

Next Steps:

Relative to the liabilities of the company, Barclays’s safer form of borrowing is unenviably low. Also its cash flow could be negatively impacted by its below-average bad debt management. These risk metrics suggest there is room for improve in terms of its operational risk management to increase investors’ conviction in the business. We’ve only touched on operational risks for BARC in this article. But as a stock investment, there are other fundamentals you need to understand. I’ve put together three essential factors you should look at:

  1. Future Outlook: What are well-informed industry analysts predicting for BARC’s future growth? Take a look at our free research report of analyst consensus for BARC’s outlook.
  2. Valuation: What is BARC worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether BARC is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.