2014 has been a major disappointment for investors in Barclays (LSE: BARC) (NYSE: BCS). Shares in the UK-focused bank have fallen by 13% during the course of 2014, which is well below the 4% fall in the FTSE 100 over the same time period.
Indeed, allegations of wrongdoing regarding its dark pool trading system and amounts set aside for potential payouts regarding currency manipulation have caused sentiment in Barclays to weaken substantially during the year.
However, 2015 could be a completely different story and Barclays could become the UK’s best performing banking stock. Here’s why.
Valuation
With shares in Barclays having fallen during 2014, they now trade on a supremely attractive valuation. For example, they have a price to book ratio of just 0.7 and a price to earnings (P/E) ratio of 11.4. Both of these figures appear to be far too low, since the balance sheet of Barclays is not only improving significantly, it is also becoming much more profitable.
For example, during the credit crunch it was assumed that the asset base of banks such as Barclays would decline over the medium term as a result of asset writedowns. This was a fair assumption to make, given that asset prices and developed economies were experiencing severe turbulence. However, with the UK and global economies now performing far, far better than even a couple of years ago, a price to book ratio of just 0.7 seems simply too low to justify. As a result, Barclays could see this ratio (and its share price) move higher.
In addition, Barclays is forecast to increase profitability at a vast pace. This is not a bank that is struggling to deliver bottom line growth, with earnings expected to increase by a whopping 25% in the current year and by a further 28% next year. With such a low P/E ratio, this puts shares in Barclays on a price to earnings growth (PEG) ratio of just 0.5, which shows that there is vast potential upside.
Looking Ahead
Certainly, Barclays is not out of the woods yet. Further provisions for PPI claims and other regulatory probes may be necessary and, as we have seen during the course of 2014, they could hit sentiment in the short term. However, with such a low valuation and such bright earnings growth prospects due in part to an improving UK and global economy, Barclays looks like a steal at its current share price. As a result, it’s my top banking pick for 2015.
