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With the Financial institution of England slashing rates of interest to three.75% this month – the sixth minimize since August 2024 – UK banks are within the highlight. As a inventory I’ve been contemplating for a while, I’m significantly to see how Barclays (LSE: BARC) shares fare.
Extra cuts loom in 2026, probably lowering to three.25% or decrease by mid-year, as inflation cools. And right here’s the place I’m involved: banks like Barclays reside off the unfold between mortgage charges and deposits (web curiosity margin, or NIM). Falling charges squeeze that unfold, probably hurting income. Barclays’ Q3 confirmed NIM holding at 3.1%, however analysts warn extended cuts may shave £1bn+ off group revenue subsequent 12 months.
So, what occurs to the share worth?
Brief time period, the worth may dip as a lot as 20% if NIM compresses quicker than anticipated. However the shares have climbed an unimaginable 75% this 12 months and are nonetheless buying and selling with a ahead price-to-earnings (P/E) ratio of solely 8. So even a pointy correction would solely mildly dent the latest development.
What’s extra, a robust rebound may observe if non-interest income improves. The financial institution’s funding and wealth administration arm accounts for 40% of income and sometimes thrives in unstable markets.
Weighing up the professionals and cons
Supporting the bullish narrative is Barclays’ diversified enterprise mannequin which may offset NIM squeezes and drive rebounds. On high of that it has a beneficial dividend coverage with £1bn+ in buybacks deliberate.
That mentioned, the cons hit onerous on the income entrance. Banks thrive on the unfold between mortgage charges and deposits, so compressed NIM may probably dampen 2026 earnings and wipe out a lot of this 12 months’s beneficial properties. Loans additionally current a threat: in Q3, the financial institution reported £632m in mortgage impairments.
The general UK financial institution sector
If the financial system slows some extra, unhealthy loans may spike additional, including threat to all the UK banking sector. To not point out regulatory complications just like the latest motor finance scandal. Lloyds and NatWest are in an identical place, so the broader UK banking sector faces a probably unstable 12 months forward.
With the next 3.5% dividend yield, Lloyds does supply some advantages over Barclays — but it surely additionally appears pricier, with the next P/E ratio. Natwest, however, has a reasonably low P/E ratio and a good 3.8% yield. Nonetheless, it hasn’t loved the identical spectacular development as each Lloyds and Barclays this 12 months.
Last ideas
Total, Barclays could also be interesting to affected person dividend hunters like myself — if we’re keen to climate NIM dangers. Nonetheless, it ought to solely be thought-about as a part of a diversified portfolio. Buyers also needs to think about some potential rate-cut beneficiaries like housebuilders or high-yield insurers. Just a few that come to thoughts embrace Persimmon, Barratt Redrow, Phoenix Group and Authorized & Common.
It might even be value exploring the mid-cap FTSE 250 index. Falling UK rates of interest profit such mid-caps by slashing borrowing prices for these often-debt-reliant companies, boosting margins and liberating money for development or dividends. Traditionally, such shares outperform large-caps after fee cuts, as seen in previous cycles, because of their cyclical housebuilders, industrials, and client performs that thrive on cheaper mortgages and spending.
