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I’m very fond of Barclays (LSE:BARC) shares. When the stock was trading below £1.50 a few years ago, I had more conviction about it than almost any other investment.
Today, it’s trading around £4.50 and I believe that’s a modest undervaluation. Let’s explore why.
Diversification premium
Traditionally, diversified banks have traded at a premium to their peers. In other words, they’re more expensive relative to their earnings.
Why? Well, it’s a resilience thing. Lloyds, for example, is heavily exposed to the UK mortgage market. At the moment, that’s not a bad thing. But what if it all went wrong?
If UK house prices start falling, if interest rates reduce significantly, or Britons start defaulting on their mortgages… well, Lloyds would feel that pain acutely. Barclays, with its more diversified revenue streams, would have more of a cushion.
Barclays’ US business has been performing strongly. America’s economy is forecast to grow 2.5% in 2026, while Britain muddles along.
More importantly, Barclays’ investment banking arm is positioned for what could be a blockbuster IPO year. Companies like SpaceX, OpenAI and Anthropic are eyeing public debuts at valuations potentially reaching $1trn.
If Barclays secures book-running mandates on these mega-deals, the advisory and underwriting fees could significantly boost group returns — diversification that Lloyds simply can’t match.
Even if it doesn’t run the book on any of these big deals, I think there’s a lot of opportunity in investment markets in 2026.
No premium valuation
UK banks look a lot more expensive than they did a few years ago. Barclays’ price-to-earnings (P/E) is roughly 80% higher than it was during the Silicon Valley Bank fiasco.
However, that doesn’t mean Barclays is necessarily bad value today. The economic climate’s broadly stronger that is was a few years ago and there are fewer concerns about widespread delinquencies or bad debt.
With that in mind, Barclays doesn’t appear to be bad value at 8.2 times forward earnings. This figure falls to 7.3 times for 2027 based on current projections.
The price-to-book value sits below peers at 0.81, while the dividend yield at 2.7% is probably the only real relative disappointment versus peers.
For me, all of this points towards a modest undervaluation in the near term. And for once, I broadly share the sentiment of analysts covering the stock.
The average share price target now sits around £5.31. That’s 17% above the current price.
The bottom line
There’s a lot of ‘ifs’ coming up… but if interest rates retreat and remain in the Goldilocks Zone (around 2%-3.5%) and economic growth remains positive in the UK and US, I expect to see earnings continue on the current positive trajectory. And if that happens, the stock should push towards £6 over the next two years.
However, there are plenty of risks. Artificial intelligence (AI) could be one of them. Economists are forecasting mass layoffs as AI takes white-collar jobs. I’d imagine that would create a surge in bad debt.
Anyway, that remains a distant possibility. For now, Barclays is worth considering. That said, there are better value options from the FTSE 100 — they just might struggle to gain recognition.
