Barclays’ (LSE: BARC) share price is near its 21 May one-year high of £3.31. Any break above that would see it hit levels not reached since 22 May 2013 when it dealt at £3.38 before moving lower.
I think the key element to this surge in recent months has been a series of strong results. These resulted from a well-executed switch from an interest-based banking model to a fee-based one.
Some investors may shirk at the notion of buying a stock that has risen so much already. Others may feel compelled to jump on what they see as unstoppable bullish momentum and buy the shares.
Neither approach is in useful for making big, sustained gains over time, in my experience. This includes several years as a senior investment bank trader and over three decades as a private investor.
I am only concerned with whether there is any value left in a stock and what the business’s earnings growth potential is.
Earnings growth prospects
Analysts forecast that Barclays’ earnings will increase by 7.2% a year to the end of 2027.
A risk here is declines in interest rates in its key markets, as these might reduce its net interest income. This is the profit from the interest rate difference between loans and deposits.
However, Barclays’ switch to fee-based income rather than NII has served it well so far. In 2024 its income grew 6% year on year to £26.788bn and its profit before tax leapt 24% to £8.108bn.
Its fee-based income from investment banking climbed 7% to £11.805bn. And fee-based income from private banking and wealth management increased 8% to £1.309bn.
In Q1 this year, income was up 11% year on year to £7.7bn, while profit before tax increased 17% to £2.7bn.
Income from investment banking over the quarter rose 16% to £3.873bn. Private banking and wealth management income jumped 12% to £349m.
Share valuation
Barclays’ 8.2 price-to-earnings ratio is bottom of its peer group, which averages 10.3. These banks are NatWest at 8.8, Standard Chartered at 9.8, HSBC at 10.4, and Lloyds at 12.
So, Barclays seems very undervalued on this measure.
The same is true of its 0.6 price-to-book ratio — again bottom of its competitor group, with a 0.9 average.
And it is also very undervalued on its 1.9 price-to-sales ratio compared to the 2.7 average of its peers. And once more it is bottom of the group here as well.
I ran a discounted cash flow analysis to put these valuations into a share price context. Using other analysts’ figures and my own, this shows Barclays shares are 55% undervalued at their present price of £3.27.
Therefore, their ‘fair value’ is £7.27. Consequently, it looks to me like the bank’s share price rally may have a long way left to run.
Will I buy the shares?
I focus on stocks that generate a high dividend yield (7%+) so I can keep reducing my working commitments. Barclays currently yields 2.6%, so they are not for me.
However, its strong earnings growth prospects should drive the share price (and dividends) higher over time.
Therefore, I think it is well worth investors considering if it suits their overall portfolio objectives.
