Today’s results from Barclays (LSE: BARC) (NYSE: BCS.US) were not quite as bad as the market had expected, with underlying profit falling by 8% in the second quarter of this year. That’s why shares are up 4.5% at the time of writing, although their performance over the course of 2014 has been hugely disappointing.
Indeed, shares in Barclays are currently down 15% during 2014, while the FTSE 100 has posted a gain of 1%. Despite this disappointing performance, Barclays could become your most profitable investment. Here’s why.
More One-Off Items
Part of the reason for an underperforming share price has been continued allegations regarding wrongdoing at the bank. The latest of these concerns high-frequency trading in Barclays’ dark pool trading system and is hanging over the company and depressing market sentiment. Indeed, another challenge faced by the bank is yet more PPI provisions, with a further £900 million being put aside in recent months.
This is eating away at profit, but is unlikely to continue indefinitely. As such, when PPI provisions are at an end, Barclays should naturally see a pick-up in profits. Similarly, allegations of wrongdoing appear to be, in the main, legacy issues. New management is intent on creating a ‘new’ Barclays that focuses on ethics and, therefore, it is hoped that over time there will be fewer allegations of wrongdoing, which could impact positively on the bank’s returns and share price.
An Exceptional Opportunity
With Barclays being in a transitional phase, as it reduces its reliance on investment banking and continues to sell off assets that it deems too risky and without adequate reward, its current share price offers an exceptional opportunity to buy into a highly profitable bank at a very low price. For example, Barclays has a price to book ratio of just 0.68, which is extremely low, while its price to earnings ratio is only 10.4 — much less than the FTSE 100’s P/E of 13.9
Looking Ahead
Certainly, there are likely to be more lumps and bumps along the way, as the PPI claims and investigations are not yet concluded. Furthermore, Barclays is fundamentally changing its business model and it attempting to de-risk its balance sheet. Both of these factors could depress share prices in the short run.
However, looking beyond the short term highlights a great opportunity to buy shares in a highly profitable bank for a very low price. With the outlook for the sector and the world economy improving, this could prove to be a highly potent mix and mean that Barclays becomes, in time, your best performing investment.
