Today’s results from the Bank of England stress test paints Barclays (LSE: BARC) (NYSE: BCS.US) in a relatively positive light. That’s because its capital position remained significantly above the regulator’s threshold of 4.5% during the stress test, with it in fact not falling below 7% at any time during the test period.
This shows that Barclays is relatively well prepared for an extreme scenario that included changes such as house price falls of 35%, inflation rising to 6.6%, the FTSE 100 falling by 30% and unemployment rising to around 12%. As a result, Barclays’ capital position appears to be in relatively sound shape and this should provide investors in the bank with a degree of confidence regarding its future viability as a business.
Growth Potential
Of course, Barclays was expected to pass the stress test; hence the rather muted response by investors to the news (its share price is up less than 1% at the time of writing). However, it appears as though the market is not yet fully pricing in Barclays’ potential to deliver stunning earnings growth over the next couple of years. That’s because Barclays trades on a relatively low valuation despite having growth prospects that are among the most appealing in its sector.
For example, Barclays is forecast to increase its bottom line by 21% in the current year, and by a further 29% next year. These are hugely impressive rates of growth and, in fact, have been upgraded in recent months as the UK economy continues to make encouraging progress and Barclays sees demand for new loans tick up.
Valuation
Despite this, Barclays still seems to be held back by uncertainty regarding allegations of wrongdoing. Clearly, this is somewhat understandable since possible fines could have a negative impact on the bank’s profitability moving forward. However, Barclays’ current valuation appears to more than adequately price in such a risk, with a price to earnings (P/E) ratio of 11.1 offering a considerable margin of safety via a price to earnings growth (PEG) ratio of just 0.3.
Looking Ahead
While no company comes without risk for investors, Barclays appears to offer a highly enticing risk/reward ratio. Certainly, there could be bad news to come in the near term and further fines are a very real threat to the bank’s bottom line. However, with it having passed the regulator’s stress test with headroom to spare, and with such a wide margin of safety on offer in its share price, Barclays seems to offer a very appealing investment case at the present time. As a result, it could be well-worth buying and may turn out to be a star performer in 2015 and beyond.
