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Has Barclays PLC Recovered From Past Mistakes?

There’s no deBarclaysnying that Barclays (LSE: BARC) has made many mistakes over the past 24 months. Indeed, in the past 12 months alone the bank has been faced with lawsuits, fines and demands from regulators to raise more capital.

However, Barclays now seems to be making a comeback.

For example, reading through Barclays’ first half results, it would appear that the bank is making progress on many fronts. The value of risk-weighted assets is falling and profits are rising at the company’s personal and corporate banking arms. 

Making progress 

Overall, apart from Barclays’ investment banking arm, all of the bank’s major divisions made progress during the first half of the year. What’s more, at the end of July the bank reported that credit impairment charges had improved during the second quarter by 13% to £937m, thanks to an improving UK economy. Operating costs fell by 4.4% during the same period to £7.9bn.

Then there’s Barclays’ world leading Barclaycard division, which reported an 8% rise in profitability during the second quarter. Higher sales volumes sent Barclaycard’s profit upto £396m for the period.

Unfortunately, the bank did report a 10% fall in pre-tax profit overall, although this was entirely down to the investment bank’s poor performance. Barclays’ investment bank reported a 46% decline in pre-tax profits for the period. 

Still, the bank’s personal and corporate banking divisions reported a 23% hike in profits, which aligns with Barclays’ new strategy of moving away from investment banking, towards a more customer focused, high-street bank.

All in all, Barclays’ first half results revealed that the bank is moving forward, albeit slowly and things are changing. However, there’s no denying that the turnaround will take time and there are still plenty of risks ahead. 

Risks ahead 

The biggest risk facing Barclays is what can only be described as a wave of litigation. The most pessimistic City analysts reckon that this litigation could cost the bank a total of £7bn over the next few years.

But it’s not just the monetary cost that will have an effect on Barclays, the bank’s reputation is also at risk. Indeed, the dark pool scandal earlier this year, where Barclays was found to be misleading clients about the trading conditions within its dark pool, cost the bank some of its biggest clients.  

That being said, so far Barclays appears to be coping well with the litigation and negative press surrounding the company, which leads me to believe that the bank is well placed to weather the storm.

Undervalued

Even after factoring in all the headwinds facing Barclays, the bank is still trading at an undemanding valuation, offering an attractive risk/reward profile. Specifically, at present levels the bank is trading at a forward P/E of 10.4 and a 2015 P/E of 7.9, compared to the banking sector average P/E of 25.5.

So overall, based on Barclays’ low valuation and plans to return to growth, the bank looks to be an attractive investment at present levels.

Differing opinions 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.