A lump sum of £20,000 invested in FTSE 100 banking giant Barclays (LSE: BARC) two years ago would be worth £48,571 today, including dividends. That is a staggering 143% total return over just 24 months.
The surge has been driven by a sharp rebound in profitability, aggressive cost‑cutting, and a buyback programme. But despite this momentum, the shares still trade on a relatively modest valuation.
So, how much further could this rally realistically run?
How are its fee-based businesses doing?
Gains in any firm’s share price and dividends are driven by sustained earnings growth. In Barclays’ case, one key driver is strong momentum in its fee‑based corporate and investment banking divisions.
Income from the former jumped 18% year on year to £2.064bn in 2025, while that from the latter rose 7% to £13.055bn. It underlined the strength of Barclays’ higher trading volumes and improving deal pipelines feeding through into earnings.
Further momentum comes from ongoing balance‑sheet expansion in high‑quality lending. Group loans and advances increased £15.5bn last year to £430bn, driven by mortgage growth, cards, and corporate lending.
What are the other major growth drivers?
Barclays is also seeing strong growth in its UK net interest income (NII). This is the difference between money made on the interest charged on loans and paid on deposits. NII soared 15% in 2025 to £7.653bn, enhanced by the integration of Tesco Bank and higher income from its ongoing structural hedge. It is a long‑dated interest‑rate portfolio that smooths earnings when rates move, and it continues to support income even as margins stabilise.
One risk here is increased competition in the banking sector that could squeeze Barclays’ margins. Another is continued elevated gilt yields, which could keep its funding costs high.
Nevertheless, management upgraded its return on tangible equity target — a key profitability measure for banks — to above 14% by 2028 (from over 12%). And analysts forecast its earnings will grow by a robust annual average of 9% over the medium term at minimum.
So where ‘should’ the shares be trading?
‘Fair value’ represents the true worth of the underlying business, while price is simply whatever the market will pay at any moment.
The key point here is that asset prices tend to converge to their fair value over time. So understanding and quantifying the difference between price and value is crucial for long-term investors’ profits.
In Barclays’ case, a discounted cash flow analysis — using an 8.3% discount rate — shows the shares are potentially 54% undervalued at their current £4.42 price.
Some analysts’ DCF modelling is more bullish than mine, others more bearish — depending on the variables used. However, based on my DCF work, the fair value for the shares is around £9.61 — more than double today’s price.
So that price-to-valuation gap suggests a potentially terrific buying opportunity to consider today if those DCF assumptions prove correct.
My investment view
Barclays’ upgraded profitability targets point to a business with improving returns and a clearer strategic direction. With the shares still way below DCF‑based fair value, the current price‑to‑valuation gap offers investors a potentially attractive long‑term opportunity to consider.
I already have holdings in two banks — HSBC and NatWest — so owning another would unbalance my portfolio’s risk/reward balance. However, other bargain-basement opportunities have caught my eye, with several also generating high dividend income as well.
