Barclays (LSE: BARC) shares are down from their 4 February one-year trade high of £5.06. This pullback looks to me to be the result of broad-based profit-taking after a strong previous run. Nonetheless, it exacerbates the existing mispricing relative to the strength of the bank’s core operations, in my view.
Indeed, the underlying business continues to generate solid earnings, maintain a strong capital position, and return substantial cash to shareholders. And that disconnect points to a potentially excellent opportunity for long-term investors to benefit if the price gravitates towards its ‘fair value’.
So, what sort of potential gains are we looking at here?
How big is the price-to-value gap?
Asset prices, including shares, tend to move back towards a company’s ‘fair value’ over time. And to estimate fair value, discounted cash flow (DCF) analysis projects future cash flows and discounts them back to today. The more uncertain those projections are, the higher the return investors demand, increasing the discount rate.
DCF models vary depending on the assumptions used by the analyst. Using my own framework — including an 8.3% discount rate — Barclays shares appear 54% undervalued at their present price of £4.18. That implies a fair value of £9.09, more than twice the current level.
So, if the price continues to converge towards fair value, this could be a tremendous buying opportunity if those DCF assumptions hold good.
Supported by strong fundamentals?
Q1 2026’s results, released on 28 April, showed group income up 6% year on year to £8.2bn. It reflected the benefit of higher net interest income, supported by lending growth across the UK and US businesses and structural hedge gains. The hedge is a long‑dated interest‑rate portfolio that smooths earnings when rates move, and it continues to support income even as margins stabilise.
Profit before tax increased 3% to £2.8bn, highlighting the resilience of the bank’s diversified model, despite a £200m impairment in the Investment Bank. Elsewhere in its fee-based operations, Markets’ income grew 6% to £2.832bn, with Equities up 16%. This underlined the ongoing benefit of the bank’s recent shift toward fee-based rather than income-based business.
That said, its interest-based US Consumer Bank division also saw its income rise — by 14% to £983m. It reflected strong business growth and a higher net interest margin of 12.76%.
Together, these drivers point to a business with firm earnings momentum and improving operational efficiency. A risk here is that a period of weaker markets could still affect client activity and reduce fee income across the Investment Bank. Another is that credit conditions could tighten further, which may lead to higher impairments.
Nevertheless, analysts forecast that Barclays’ earnings will increase by an annual average of 8.6% a year to end-2028 at minimum. And this is what ultimately catalyses share price gains over the long run.
My investment view
I already have holdings in HSBC and NatWest, so adding another bank would unsettle my portfolio’s risk/reward balance. Instead, I am looking at similarly undervalued high-performance stocks in other sectors.
However, for those without this conundrum, Barclays’ combination of a wide price‑to‑value gap, firm earnings momentum, and consistent capital returns leaves it looking attractively positioned and one for long‑term investors to consider.
