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The Barclays (LSE:BARC) share price has surged, rewarding investors over the past two years. After years of trading on heavily discounted valuations, the stock’s undergone a substantial re-rating as sentiment towards the British banking sector improved and as management committed to a leaner, more disciplined operating model. The question for investors now is: where next?
Re-rating and recovery
Between 2020 and 2023, Barclays’ shares were depressed by historical standards. The pandemic, the cost-of-living crisis and political turmoil contributed to a negative opinion on the health of UK banking stocks. Interestingly however, performance throughout these years remained pretty strong.
Since then however, the bank’s rebounded strongly. This surge has been supported by rising earnings, cost discipline, and a stronger capital position. Importantly, management’s been focused on optimising risk-weighted assets (RWAs), ensuring capital’s deployed more efficiently across retail, corporate and investment banking activities. The return on tangible equity (RoTE) has also moved closer to peers, helping close the valuation gap between Barclays and international rivals.
Still cheap?
Even after the re-rating, Barclays trades at modest valuation multiples compared to global peers. The bank’s forward price-to-earnings (P/E) ratio stands at around nine times for 2025, falling to 6.5 times by 2027. This reflects the consensus expectations for continued earnings growth.
Similarly, the price-to-book ratio (P/B) remains below 0.81 times. This is a level that still implies significant investor caution about the sustainability of returns.
The current consensus estimate sees earnings per share (EPS) rise from 34.8p in 2024 to 57.6p in 2027. That’s a compound annual growth rate of around 19%.
Alongside this, dividends are expected to steadily increase, from 8.4p per share in 2024 to 12.7p in 2027, equating to a forward yield of 3.4%. While not as high-yielding as some other FTSE 100 banks, it’s not to be sniffed at.
Analyst sentiment
Overall, the consensus rating remains Outperform, suggesting that most analysts believe the re-rating isn’t yet complete. However, according to consensus, the average analyst target price for Barclays is 399p, 6.8% above the current share price. There’s not a huge margin for safety there.
Investors should also remain mindful of several risks. First, a downturn in UK or global economic activity could weigh on loan growth and lead to higher impairments. Second, competition in both consumer banking and wealth management continues to intensify. These are factors worth keeping an eye on after a strong run.
I’ll also add that Goldman Sachs has just downgraded several German banks after a strong run. These re-rating stories can’t go on forever when the economy, in the UK as it is in Germany, remains pretty stagnant.
The bottom line
For investors willing to accept the cyclical risks inherent in banking, Barclays may still be undervalued versus its earnings potential. However, the next leg of the story may be less about multiple expansion and more about the bank delivering sustainable returns on capital.
I still believe investors should consider Barclays. However, as one of my largest holdings, I’m unlikely to buy more.
