2014 has been a very different experience thus far for investors in Barclays (LSE: BARC) than it has been for their counterparts in Santander (LSE: BNC). That’s because, while Barclays has suffered from weak investor sentiment and has seen its share price plunge by 13% year-to-date, shares in Santander have kicked on and delivered an impressive return of 12% over the same time period.
However, both banks have huge potential and could see their share prices increase by 50% over the medium term. Here’s why.
An Improving Outlook
Clearly, the economic performance of the Eurozone remains disappointing, with anaemic levels of growth being the best on offer right now. However, the situation is much improved on where it was a couple of years ago, when a number of European countries were apparently on the brink of collapse. Furthermore, the UK economy has gained considerable ground over the same time period and is now among the fastest growing of the developed nations, with the IMF upgrading the UK’s GDP growth forecast to 3.2% for 2014 (from just 1.5% a year ago).
Growth Potential
This is clearly great news for the banking sector, since it means more demand for new loans and fewer write downs. Indeed, improvements in the outlook for the UK and European economies can be seen in the growth potential of Barclays and Santander over the next couple of years. For example, Barclays is expected to increase earnings by 27% in the current year and by 28% next year, while Santander is due to see its bottom line grow by 23% in the current year and by 22% next year.
Valuation
Both of these growth rates are extremely strong and mean that earnings are due to be 63% higher at Barclays in 2015 than they were in 2013, and 50% higher at Santander over the same time period. This means that, if Barclays and Santander maintain their current trailing price to earnings (P/E) ratios of 14.1 and 19.3 respectively (which is very feasible given their strong growth potential), shares in the two companies could be trading 63% and 50% higher (respectively) in a couple of years’ time.
Looking Ahead
Although such strong share price growth may seem difficult to justify, both banks have remained highly profitable during the last five years and yet are still set to grow profits at a high rate. In other words, they appear to offer a potent mix of superb growth potential and greater resilience than many of their peers. As a result, Barclays and Santander could prove to be two banking stocks that are well worth buying and holding over the next few years.
