Barclays (LSE:BARC) shares have been on a tear. Over the past six months alone, the share price has surged by around 42%, handsomely rewarding investors who backed the banking giant’s continued recovery.
To put that into context, £20,000 invested in Barclays shares six months ago would now be worth roughly £28,400. That’s before dividends. It’s an impressive return in a relatively short period, especially for a stock long viewed as a slow-moving, cyclical play.
But with such a sharp rally already behind it, the obvious question for investors now is whether the best gains have been made — or whether other, less obvious opportunities in the banking sector could deliver even stronger returns from here.
The new value proposition
The value proposition looks very different today to what it was just a couple of years ago. Back then, Barclays shares were deeply out of favour.
The bank was trading at around five times forward earnings during the Silicon Valley Bank fiasco, with a 5%–6% dividend yield, despite a steadily improving operating backdrop.
Concerns around the performance of investment bank and impairment charges in a choppy UK economy meant the market was pricing in very little growth.
That was a huge opportunity. I bought a significant holding at around 135p, but sentiment was still extremely cautious.
Since then, the picture has shifted materially. Earnings have proven more resilient than expected, capital generation has been strong, and confidence in distributions has improved.
Forecasted normalised earnings per share are now expected to rise from 38p in 2024 to 53p in 2026, implying growth of more than 20% next year.
But with the shares having rerated sharply, the forward multiple has expanded into double digits and the yield has compressed. Barclays is no longer obviously cheap — it’s now a recovery story that much of the market has already recognised.
Are there alternatives?
Absolutely, but investors may find better value outside the FTSE 100.
TBC Group stands out as a deeply undervalued bank trading at around 5.1 times forward earnings. It’s a lot cheaper than both its regional peer Lion Finance and the major UK banks like Barclays.
Forecasts point to robust revenue growth of roughly 17.5% annually over the next two years and earnings growth near 11%, producing an attractive price-to-earnings-to-growth (PEG) 0.45. The dividend yield of 6% appears sustainable, supported by a low payout ratio.
TBC’s exposure to the fast-growing economies of Georgia and Uzbekistan underpins this growth. However, risks include regulatory shifts in Uzbekistan and potential political and economic volatility in the region. This could dampen loan growth or disrupt operations.
Arbuthnot Banking Group also looks compelling. This bank for the wealthy trades at about 8 times forward earnings and 0.52 times book value, offering value relative to larger UK banks.
Its forward dividend yield exceeds 6%, complementing the low earnings multiple.
The bank’s conservative balance sheet — with a low loan-to-deposit ratio — reduces liquidity risk.
However, there are risks. This includes the difference between the buying and selling price as well as perceived concerns about the liquidity of smaller banks.
