I think UK financial stocks are deeply undervalued and, as a result, could rise significantly in 2021. I believe the Barclays (LSE: BARC) share price has more potential than most. That’s mostly thanks to its international diversification and investment banking arm, which has reaped enormous profits for the business over the past 12 months.
Barclays share price: return to growth
At the beginning of the coronavirus pandemic, it looked as if the world was standing at the edge of another financial crisis. To that end, regulators in the UK, Europe and the United States pressed financial institutions to suspend dividend payments to investors and make plans to raise additional capital.
Luckily, quick thinking by central bankers controlled the financial fallout. The impact on the economy has been nowhere near as bad as expected.
However, investors have been slow to return to the sector. After dumping financial stocks at the beginning of the crisis, investors have continued to stay away from holdings such as the Barclays share price.
I think this is a mistake. Not only has the sector avoided the worst, but by suspending dividend payments, banks are also healthier than they were at the beginning of 2020.
Barclays, in particular, is in a much better position than it was 12 months ago. During the crisis, the investment banking part of the organisation reported a surge in demand for its services. The group’s bankers worked flat out to help clients raise new capital. At the same time, the frantic pace of trading assets in the first half saw Barclays’ trading commissions boom.
These were only temporary tailwinds, but they helped offset losses elsewhere. So, overall, the bank has been able to pull through the crisis in one piece.
Therefore, it seems to me as if the lender has been able to navigate the crisis. Going forward, it should be able to benefit from the general economic recovery that analysts believe will begin in 2021. This should help elevate the firm’s bottom line. And that may translate into a positive performance for the Barclays share price.
A 100% return
I think there’s a chance the stock could double in value in the near term. Indeed, at the time of writing, the Barclays share price is trading at a price-to-tangible-book ratio of 0.4. That’s around half of the UK financial services sector average and significantly below the market average of 1.8.
As such, I reckon the stock could rise substantially over the next 12 months as investor confidence returns. If Barclays can restart its dividend payout and rekindle earnings growth, I believe investor sentiment will improve dramatically.
In the meantime, City analysts expect the lender to offer investors a dividend yield of around 3.5% next year. That projection implies investors will be paid to wait for the company’s recovery to take hold.
Don’t miss our special stock presentation.
It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.
They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.
That’s why they’re referring to it as the FTSE’s ‘double agent’.
Because they believe it’s working both with the market… And against it.
To find out why we think you should add it to your portfolio today…
Rupert Hargreaves owns no share mentioned. 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.