The Barclays (LSE:BARC) share price is up 55% over the past six months. It’s performing extremely well after years of disappointment for investors. And this leads me to ask, ‘what on earth’s going on’?
Sentiment’s important
Sentiment plays a crucial role in stock performance, and we’ve seen this with Barclays. This stock’s underperformed due to many reasons, including the fallout from the Silicon Valley Bank fiasco, false concerns about unrealised bond losses, negative sentiment surrounding the UK economy, and fears about defaults amid rising interest rates. These factors have collectively dampened investor confidence.
However, investor outlook’s improving. As the market adjusts and these concerns diminish, the stock’s rebounded. If I’d invested £1,000 here a year ago, today I’d have around £1,440, including dividends.
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It’s essential to recognise how shifts in market perception can significantly impact stock performance. Many analysts have highlighted that sentiment and momentum are some of the best indicators of forward performance.
Changing strategy
Barclays is undergoing something of a strategic overhaul. And this has helped lift the share price despite declining earnings. The bank reported a 12% fall in first-quarter profit as revenue fell and customers shopped around for better savings rates and mortgage deals.
Management has wowed investors with its move to reallocate funds towards the most profitable parts of the business and return money to shareholders. In February, Managing Director CS Venkatakrishnan said the company would allocate an extra £30bn in risk-weighted assets (RWA) to its UK retail division by 2026.
Barclays UK averaged a return on tangible equity (RoTE) of 19% between 2021-2023 despite only accounting for 21% of the bank’s RWA. This strategic shift is further evidenced by its recent £600 million acquisition of Tesco‘s banking arm in February.
Complementing this is an efficiency drive that will save the bank £2bn by 2026. The bank’s planning to strip £700m of costs from each of its three divisions between now and then.
A fresh value proposition
The prospect of improved efficiency and RoTE invites us to reassess the bank’s prospects. Barclays is more expensive using valuation metrics today than it was a year ago. It’s currently trading around eight times earnings versus around 4.5 times a year ago.
However, earnings are expected to grow throughout the medium term. In fact, some analysts are suggesting that earnings per share (EPS) will grow at 17% annually over the next three to five years. In turn, this leads to a price-to-earnings-to-growth (PEG) ratio of 0.43. That would be very attractive.
I’m wary that the UK economy isn’t going to become the dynamic beast we’re hoping for, even under a new government. That’s certainly a drawback, and one that will mean it won’t trade with the same multiples that US banks do.
Nonetheless, it’s great to see a UK banking institution turn things around. I hope we’ll see Barclays go from strength to strength in the coming years. Every positive earnings report will give us hope that it can be done.
