Like many of its peers, Barclays (LSE: BARC) (NYSE: BCS.US) is still trying to recover from the financial crisis. And the full scale of the bank’s recovery, or lack of, can be seen in Barclays’ share price.
For example, Barclays’ shares hit an all-time high of 790p during 2007, only a few weeks before the financial crisis really started to hit the banking industry. Around eight years later, Barclays’ shares are still 67% below their all-time high.
Nonetheless, in many ways Barclays is stronger today than it was before the credit crisis began — but there is still plenty of work to be done.
The question is, can the bank ever return to its pre-crisis glory?
Falling returns
Back in 2006, Barclays’ profits hit record levels as the bank profited from its recent acquisition of South African lender, Absa, and consumer credit demand continued to surge.
Barclays’ return on equity — a key measure of bank profitability — hit a staggering 24.7% for 2006, which helped the group report earnings per share of 66.8p for the year, a figure that helped to drive Barclays’ share price to its all-time high.
However, since 2007 a lot has changed and Barclays is no longer the bank that it once was. For example, Barclays’ return on equity has averaged a measly 4.5% per annum for the past two years.
That being said, the bank’s management are targeting a return on equity of 12% in the medium term — a huge improvement on the 5.1% reported for last year. However, I’d argue that a low-teens return is unlikely to be enough to drive the bank’s share price back to where it was before the financial crisis.
But this doesn’t mean that Barclays is a bad investment: the bank has plenty going for it. While Barclays may not return to 790p any time soon, there’s scope for the shares to double from current levels if the bank continues to cut costs and boost sales in line with City estimates.
City growth targets
City analysts expect Barclays’ earnings per share to rise by a staggering 70%, to 29.4p by 2016. On this basis, the group is currently trading at a 2016 P/E of 8.5, far below the banking sector average of around 19.
Moreover, if Barclays meets these lofty targets for growth, the market should re-rate the bank’s shares, giving them the growth multiple they deserve. Even a modest growth multiple of 14 times earnings would see Barclays’ shares rise to 411p by 2016.
