There was little excitement last week when the new CEO of Barclays (LSE: BARC) was announced. The bank’s share price did not seem to react either positively or negatively to the news, with it receiving only minimal exposure on news services, too.
This, though, is not a major surprise, since the world seems to have forgotten about Barclays and, to an extent, the wider banking sector. At the very least, it seems disinterested, with the challenges posed by a slowing China, a tightening US monetary policy and a resources sector which is showing little sign of life dominating investors’ thoughts. Barclays and its banking peers, it seems, are yesterday’s news.
Huge appeal
However, this could be just the right time to buy into undervalued banking stocks, since a lack of upbeat investor sentiment indicates that there is strong capital gain potential on offer over the medium to long term. On this front, Barclays has huge appeal since it trades on a price to book value (P/B) ratio of just 0.6 which, given the positive outlook for the UK economy, seems unjustifiably low due to the prospect of major asset writedowns being relatively unlikely.
Looking ahead, the bank’s new CEO is likely to be tasked with refocusing on Barclays’ investment banking operations. In recent years it has attempted to move away from the apparently riskier activities — blamed by many for the credit crunch — and instead focus on being a more traditional bank, concentrating on lending to businesses and individuals. However, with profitability being the key focus in the long run, the bank has an opportunity to rebalance its risk/reward ratio and seek out growth opportunities.
That said, Barclays is due to post excellent bottom line growth numbers over the next couple of years. For example, it is forecast to deliver a rise in earnings of 32% in the current year followed by growth of 19% next year. These figures are much higher than the equivalent numbers for most of its UK-listed banking peers and put Barclays on a forward price to earnings (P/E) ratio of only 8.6.
Economic tailwind
With the UK economy moving from strength to strength, Barclays is likely to benefit from an economic tailwind. And, with the US and global economy still growing at a brisk pace, its future profit growth potential remains high and this could lead to a major upward re-rating of its shares over the medium to long term.
As for whether this will be sufficient to push its share price from the current lowly 235p to its all-time high of just under 800p achieved in 2007, Barclays would need to trade on a forward P/E ratio of 29.4 in order to reach those heights at the present time. Clearly, this is highly unlikely in the short run but, looking ahead, it is very achievable.
For example, if Barclays were to grow its earnings by 7.7% per annum over the next ten years and be subject to an upward rerating of its shares so that it had a P/E ratio of 14, its share price would hit 800p.
Clearly, 2025 is a long way away off, but if Barclays were to reach 800p within that timeframe it would equate to an annualised capital gain of 13% plus dividends which currently stand at 2.8% and which are likely to rapidly rise. Therefore, although Barclays may currently be unpopular, it continues to make great sense as a long term investment.