Barclays (LSE: BARC) shares look mispriced to me given the strength of its recent performance and the scale of its upgraded ambitions.
It has delivered rising income, firmer profitability and a clearer path to higher returns. Yet it still trades at a big discount to its closest peers and to its ‘fair value’.
With analysts expecting steady earnings growth and management committing to substantial capital returns, how high could the shares go?
Earnings growth drivers
The engine driving long-term rises in any company’s share price is earnings (‘profits’) growth. A risk for Barclays is tough competition that may squeeze its margins over time. Nonetheless, analysts forecast its earnings will grow an average of 8.6% a year to end-2028.
Its recent 2025 results saw profit before tax (PBT) jump 12.3% to £9.1bn. Return on tangible equity (ROTE) — a key profit measure for banks — rose 0.8 percentage points to 11.3%.
Within these numbers, interest income in the UK continued to improve, increasing 5% over the year. That reflects an easing in the squeeze on interest margins, as steadier rates reduced the need for banks to keep lifting savings rates.
Another positive tailwind remains Barclays investment bank, which delivered over 50% of group PBT. This has been a key part of the shift in its business model in the past year towards fee-based, rather than interest-based, income.
Barclays upgraded its ROTE target to above 14% by 2028, up from more than 12%. It also expects to return over £15bn of capital to shareholders between 2026 and 2028. And it announced a £1bn share buyback, with these tending to support share price gains.
Undervalued to peers?
Barclays’ price-to-earnings ratio of 11.3 is second from bottom of its peer group, which averages 14.3.
These peers comprise NatWest at 9.4, Standard Chartered at 12.7, Lloyds at 14.6, and HSBC at 18.6. So, the shares are a bargain on this measure.
The same is true of its 2.5 price-to-sales ratio — bottom of its competitor group, which averages 3.5.
Where should the shares trade?
I ran a discounted cash flow (DCF) analysis, which estimates any company’s fair value by projecting its future cash flows and then discounting them back to today.
In Barclays’ case, I used a discount rate of 8.4% and a perpetual growth rate of 3% (the five-year average UK 10-year gilt yield). Other DCF models may use different inputs, and many produce lower valuations.
However, my modelling suggests Barclays’ shares are 49% undervalued at their current £4.62 price. That implies a fair value of £9.06 — nearly double where the stock trades today.
And because asset prices tend to converge to their fair value in the long run, it suggests a potentially superb buying opportunity to consider today if those DCF assumptions hold.
My investment view
I already have bank sector holdings in NatWest and HSBC, so adding another would unsettle the risk-reward balance of my protfolio.
However, Barclays’ mix of rising earnings, stronger profitability and sizeable planned capital returns gives the shares clear support.
The valuation still looks undemanding even after the recent gains, especially against upgraded long-term targets.
For investors willing to take a multi-year view, the combination of growth and income makes the stock worthy of attention, in my view.
