Although many people in the UK may not have felt it in their back pockets, the UK economy is moving from strength to strength and this is having a hugely positive impact on banks such as Barclays (LSE: BARC) (NYSE: BCS.US).
In fact, the UK economy is one of the fastest growing economies in the developed world, although with inflation having been higher than wage rises for a number of years, disposable incomes have been squeezed in real terms, thereby making many people in the UK feel worse off.
Improving Financials
However, growth in the UK economy has been felt by Barclays. It has seen demand for new loans increase and the amount of write-downs it’s having to make has decreased as a result of fewer bad debts and rising asset prices. This is allowing the company’s balance sheet to recover from the biggest financial crisis in living memory. This puts it on a much sounder financial footing for the long term, which should provide investors in the bank with much higher confidence in its long term future than they had even a couple of years ago.
Valuation
Certainly, during the credit crunch there were severe doubts regarding the assets of all banks, Barclays included. Therefore, it was sensible for their valuations to reflect that uncertainty, with the majority of banks trading at a discount to their net asset value so as to take into account any future fall in the value of their assets.
However, with Barclays now operating in a much more favourable environment, it’s becoming more difficult to justify why its shares trade on such a low valuation. For example, they have a price to book (P/B) ratio of just 0.67 which, during the credit crunch, was completely acceptable, since its net asset value could have fallen significantly. However, with Barclays now being hugely profitable and on a firmer financial footing, such a discount could narrow, which would equate to strong share price growth.
Looking Ahead
Clearly, there will need to be a significant shift in investor sentiment for Barclays to deliver sustained share price growth. And, with the various allegations of wrong-doing that have dominated news flow for the company, it is little surprise that its shares are down 21% in the last year. However, with its management team still being relatively new, it will take time for it to overcome legacy issues and effect a change in culture at the bank that, in time, should equate to more positive news flow.
And, with Barclays trading on such a low valuation, now could be the perfect time to buy ahead of what may prove to be a more positive — and more profitable — period for the bank.
