Barclays Bank: Contrarian Buy

This article has been adapted from Fool U.K., our sister site across the pond.

I spent much of last weekend poring over the big banks' figures trying to decide which is the best buy -- only to find that someone had done the basics for me on Fool U.K.'s Value Shares discussion board, spawning useful discussion in its wake.

Believe me, trying to make sense of banks' accounts isn't much fun, and perhaps it's a pointless exercise. There are, after all, lots of people out there who know infinitely more than I will ever do and whose huge "bets" dictate share prices.

Then again, being a little green can be an advantage. You aren't swayed so much by the market's short-term vagaries and concentrate instead on longer-term fundamental value.

Contrarianism
On this basis, the big banks in general look like excellent long-term contrarian buys at the moment, so if you disagree vehemently, it's probably best to back your own judgment and to stop reading right now -- because buying shares in them does feel like something of a crapshoot.

My basic reasoning is that everyone seems to be shunning the ordinary shares -- but they're simultaneously sitting on low price-to-earnings ratios and low price-to-book values, and they're being judged by relatively recent events from history as well as perhaps a little political posturing.

This appeals to my contrarian instincts.

My Foolish colleague Prabhat Sakya recently weighed the case for investing in Lloyds Banking Group (NYSE: LYG  ) , while Stephen Bland added the Royal Bank of Scotland (NYSE: RBS  ) to his value portfolio, having explained last month how and why the bank is one for the long haul. I take comfort from their analyses.

Point of maximum pessimism reached?
But others disagree. Most notably, analysts at HSBC cut their share-price targets for Barclays (NYSE: BCS  ) , Lloyds, and RBS by huge margins on Thursday because of changes being considered in ring-fencing subsidiaries to hold British depositors' money.

This, it is estimated, could cost the banks 8 billion to 10 billion pounds, with Barclays and RBS the worst affected.

Last week in his Mansion House speech, Chancellor George Osborne said he supported the Independent Commission on Banking's proposal to ring-fence depositors' money. The commission will publish its final proposals in September, but the chancellor's comments show the political will to curry popular favor by bashing the banks a little more for past indiscretions.

These factors combined to hit the banks in a most unsportsmanlike fashion, while they're still on the canvas. In Barclays' case, there are particular fears that the investment-banking side of things could be hit hard as any attempt to pass on costs will see customers voting with their feet.

This may end up being a political own-goal. The ring-fencing proposal is already unpopular; the analysts don't like it one bit, and the two banks in which the government has the say have been pushed much lower than breakeven for Her Majesty's Treasury.

So it's all bad news, and the political posturing is adding fuel to the fire. But these times will be a distant memory in years to come, fickle politicians will be ingratiating themselves with the public in a different arena, and the value will come out. So if we're now at the point of maximum pessimism, it's time to be bold.

Barclays on balance
Weighing up the three most embattled banks, I think Barclays is the most measured play, taking basic value parameters into account. Its lack of government ownership sets it apart from Lloyds and RBS, while its price-to-earnings ratio and yield are more attractive. It is perhaps the least contrarian of the three, but it gets may vote on balance.

The shares bounced like a wet newspaper this past week -- up around 1% at 246 pence at the time of writing.

I, like many others, got badly stung by the reckless ambitions of RBS and those at the helm -- and by Lloyds' ill-judged takeover of banking and insurance company HBOS, which flew in the face of the conservatism we long-term shareholding yield-seekers bought into. 

But so be it. We're grown men and women, we placed our bets, and we were wrong. But that doesn't mean we're wrong to make the same judgment call again today at these low, low prices.

More from David Holding:

David owns shares in Lloyds Banking Group and Barclays.

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