Banking is hardly the most loved industry in the UK at the moment. In fact, for many investors the painful memories of the credit crunch prevent them from looking at the banks in an objective manner. While this is understandable, since many investors lost a considerable amount of capital from holding bank shares during that period, today the sector has a very different outlook.
The recent stress tests showed that the UK banking scene is in good health and should be able to survive a number of macroeconomic shocks. Furthermore, profitability at a number of banks is on the up and following this, dividend rises are somewhat inevitable as the banks gradually begin to return to their former status as strong income payers offering upbeat capital growth prospects.
Leader of the pack
Of course, it may take some time for investors to catch on to the opportunities within the banking space, but one bank that could lead the charge in 2016 is Barclays (LSE: BARC). Unlike a number of its sector peers, it has remained firmly in the black in recent years and hasn’t been required to seek a government shareholding. With the bank’s already relatively impressive bottom line forecast to rise by 24% in the current year and a further 24% in 2016, it’s set to offer stronger growth than the majority of its FTSE 100 peers.
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Despite such strong growth potential, Barclays still trades on a price-to-earnings (P/E) ratio of just 10 and it has a price-to-book value (P/B) ratio of only 0.58. Both of these figures indicate that an upward rerating is on the cards – especially since Barclays is not only highly profitable, but is set to increase its earnings in each of the next two financial years.
Aside from rising profitability, a potential catalyst for Barclays is a change in management. Jes Staley started work as Barclays’ new CEO just two weeks ago and it seems likely that a refreshed strategy will be put in place at some point during 2016. As has been the case with other companies that have changed their management teams, investors can quickly change their minds on a stock with a new face, new message and new overall strategy. This could be a major reason for improved share price performance from Barclays next year.
Clearly, Barclays’ dividend lacks appeal at the moment while the FTSE 100 yields almost 4%. However, the bank’s 3.1% yield is due to rise to 3.9% in 2016. Further rises are very likely since Barclays pays out only 30% of profit as a dividend and earnings are set to rapidly rise. So it could quickly become an income favourite.
Undoubtedly, there are still risks ahead. Barclays could be subject to further regulatory action. And while the UK and global economy have performed well in recent years, interest rate rises could act as a brake moving forward. But these potential problems appear to be more-than-adequately priced in, with Barclays having a very wide margin of safety.
Although the banking sector may have had a disastrous period, it now appears to be very much back on its feet. As a highly profitable business trading on a low valuation and offering growth potential, Barclays seems to be an obvious buy for 2016.
