Barclays PLC: It’s Always Darkest Before The Dawn

Barclays (LSE: BARC) (NYSE: BCS.US) investors are not a happy bunch at the moment, and yesterday’s AGM provided them with a public opportunity to vent their frustrations at the bank’s board.

barclaysA calculated public attack from Standard Life, which owns almost 2% of Barclays, made it clear that it’s not just private investors who are unhappy the bank paid £2.4bn in bonuses last year — three times more than the £859m it paid to shareholders as dividends.

Performance headaches

The other problem for shareholders is that Barclays’ 2013 performance was somewhat underwhelming. Profits of £5.1bn were nearly a third lower than in 2012, and the bank lagged its peers on a number of key performance metrics:

  Barclays Lloyds Banking Group HSBC Holdings
Net interest margin 1.76% 2.12% 2.13%
Cost: income ratio 71% 52.9% 59.6%
CET1 ratio (capital strength required by regulator) 9.3% 10.3% 10.9%
Loan loss rate 0.64% 0.57% 0.6%

Source: Banks’ 2013 results

It’s not pretty: in each of the four categories I’ve listed above, Barclays’ 2013 results were worse than the other two banks, and in some cases, worse even than Royal Bank of Scotland Group.

Glass half full or half empty?

I think it’s time to move on from criticism of Barclays’ remuneration policies, and to focus on its profit potential.

I reckon that all of the figures I’ve highlighted above offer an opportunity for investors. You see, although they are disappointing, these numbers aren’t bad enough to be dangerous — but improving them could trigger substantial gains.

For example, if Barclays can get its cost:income ratio down to around 60%, and boost its net interest margin to more than 2%, its profits should rise dramatically.

What’s more, Barclays satisfies one of the most important criteria for value investors, as it currently trades at a discount of around 12% to its tangible book value — meaning that you can buy £1 worth of Barclays’ assets for around 88p.

City backing Barclays?

Despite their complaints, City analysts and institutional investors seem to be backing a Barclays turnaround, too: the bank’s shares currently trade on a forecast P/E of just 9.2 and a prospective yield of 3.6%, offering decent upside potential for shareholders.

I expect Barclays earnings and dividend to rise strongly this year, and in my view, Barclays offers great value at the moment. Investor sentiment is against the bank, providing what I believe is a Warren Buffett-type opportunity to ‘buy when others are fearful’.

Once the wider market sees the value in Barclays, the bank’s share price could rise strongly — and this opportunity will be gone. 

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Roland owns shares in Barclays and HSBC Holdings but not in any of the other companies mentioned in this article.