Stock market

What on earth is happening with Barclays’ share price?

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gave Barclays (LSE:BARC)’s share price has risen 55% over the past six months. It is doing extremely well after years of disappointment for investors. And this leads me to ask, ‘What on earth is going on’?

Emotions are important.

Sentiment plays an important role in stock performance, and we’ve seen this with Barclays. The stock underperformed for a number of reasons, including the failure of Silicon Valley Bank, misplaced concerns about unrealized bond losses, negative sentiment around the UK economy, and fears of defaults amid rising interest rates. These factors have collectively dampened investor confidence.

However, the outlook for investors is improving. As the market adjusts and these concerns subside, stocks rebound. If I had invested £1,000 here a year ago, I would have around £1,440 today, including dividends.

It is important to know how changes in market sentiment can significantly affect stock performance. Many analysts have highlighted that sentiment and momentum are the best indicators of forward performance.

Changing strategy

Barclays is undergoing a strategic overhaul. And that has helped lift the share price despite the earnings decline. The bank reported a 12% drop in first-quarter profit as revenue fell and customers shopped for better savings rates and mortgage deals.

Management has surprised investors with its move to reallocate funds to the most profitable parts of the business and return money to shareholders. In February, managing director CS Venkatakrishnan said the company would allocate an additional £30bn in risk-weighted assets (RWA) to its UK retail division by 2026.

Barclays UK achieved an average return on tangible equity (RoTE) of 19% between 2021-2023 despite accounting for only 21% of the bank’s RWA. This strategic shift is further evidenced by its recent £600 million acquisition. TescoBanking arm in February.

Complementing this is an efficiency drive that will save the bank £2bn by 2026. The bank plans to shed £700m of costs from each of its three divisions between now and then.

A fresh value proposition

The prospect of better performance and RoTE invites us to reassess the bank’s prospects. Barclays is more expensive today using valuation metrics than it was a year ago. It is currently trading at around eight times earnings compared to 4.5 times a year ago.

However, earnings are expected to increase in the medium term. In fact, some analysts are suggesting that earnings per share (EPS) will grow at a rate of 17 percent annually over the next three to five years. In turn, this takes the price-to-earnings-growth (PEG) ratio to 0.43. It will be very attractive.

I am cautious that the UK economy will not become the dynamic animal we are hoping it will be, even under a new government. That’s certainly a drawback, and one that will mean it won’t trade at the same multiples that US banks do.

Nevertheless, it’s great to see a UK banking institution turning things around. I hope we will see Barclays go from strength to strength in the coming years. Every positive earnings report will give us hope that it can be done.

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