The UK banking sector continues to be relatively unpopular among investors. For example, the Barclays (LSE: BARC) share price has fallen by over 5% in the last year, and it has been highly volatile in recent months.
While more volatility and difficulties could be ahead in the near term, in the long run the sector appears to offer high investment potential. Therefore, now could be the perfect time to invest – especially with a changing outlook likely to be ahead for the wider economy.
Barclays could be a major beneficiary of the future performance of the UK economy. Uncertainty surrounding Brexit may have caused the pound to weaken and inflation to move higher, but this provides the Bank of England with the scope to raise interest rates. This could be good news for the banking sector, since it may equate to greater profit growth opportunities.
Furthermore, Brexit talks are progressing relatively smoothly at the present time. Of course, there is still a long way to go on certain issues such as the Irish border question, but with just under a year until Brexit there seems to be political will on both sides to sign an agreement. This could alleviate investor concerns surrounding the prospects for the wider economy and may lead to more favourable valuations across the banking sector.
Barclays is forecast to post a rise in earnings of 18% in the next financial year. Part of the reason for its high expected growth rate is the changes it has made to its business model in recent years. It has rationalised its asset base which is set to create a leaner and more efficient business. It has also sought to improve the strength of its balance sheet, which could help it to deliver a more favourable risk/reward ratio in future.
However, investors do not yet appear to have embraced its future growth potential. The company trades on a forward price-to-earning (P/E) ratio of just 9, which suggests that it offers a wide margin of safety and could be worth buying right now.
Of course, Barclays isn’t the only bank which could be worth buying today. Virgin Money (LSE: VM) has a P/E ratio of around 7, which suggests that it has significant upside potential. Although its bottom line is due to rise by just 2% this year as the outlook for UK consumers continues to come under pressure, the business has been able to build an impressive level of market share. This could mean that it is able to offer strong growth in more prosperous years.
While Virgin Money has a dividend yield of just 2.4% at the present time, its dividends are covered over six times by profit. This suggests that shareholder payouts could grow at a rapid rate and may allow the stock to deliver a high total return.
With challenger banks continuing to have the opportunity to win new business as the banking sector evolves and relies increasingly on new technology, Virgin Money could prove to be a sound buy for the long term.
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Peter Stephens owns shares of Barclays. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.