Since the 2008 financial crisis, the big UK banks have mostly lagged behind the wider stock market. But I think things could be changing. The Barclays (LSE: BARC) share price has beaten the FTSE 100 and all of its main UK rivals so far in 2021.
Is this 285-year-old business finally back on track to deliver sustainable growth? Or is this yet another false dawn?
I think it’s too soon to be sure, but I do know that Barclays has outperformed decisively over the last 12 months:
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1yr change (26/03/21) |
|
Barclays |
+70% |
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NatWest Group |
+45% |
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FTSE 100 |
+16% |
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Lloyds Banking Group |
+12% |
What’s behind this rapid share price surge? I’ve been taking a look to find out more.
What’s good
Since taking charge of Barclays in 2015, CEO Jes Staley has resisted investors pressure to scale back the group’s investment bank. Mr Staley has stuck to his vision of pairing Barclays’ UK-US investment bank with its high street operations.
The wisdom of this strategy was uncertain until last year, when Mr Staley’s bet paid off. Crashing UK markets triggered hard times in the real economy, as many businesses faced a sudden slowdown.
Many of Barclays’ corporate clients needed extra cash to survive lockdown. The group’s investment bankers were happy to help by raising funds on the debt and equity markets. A busy year saw income from corporate and investment banking rise by 22% to £12.5bn. According to management, it was the best year ever.
I think this strength is the main reason why the Barclays share price has outperformed its big rivals. This extra income helped to limit the damage from lower income at the group’s high street bank and credit card business.
Banks such as Lloyds and NatWest don’t have the same investment banking capabilities, so suffered bigger hits to profits last year.
What’s not so good
I’m confident that business in Barclays’ credit card and high street businesses will return to normal over time. But I’m not so sure what to expect from its investment banking division.
When a company reports record results, I think it pays to think about the situation.
Is this a genuine growth scenario where I can expect further progress over future years? Or is this a situation where unusual circumstances have boosted profits?
I can’t be sure how Barclays will perform over the next year or two. But I don’t expect another record-breaking performance from investment banking this year. I think what’s more likely is that we’ll see a more middling performance — similar to recent years, in fact.
The Barclays share price: what I’d do
The latest broker consensus forecasts suggest that Barclays’ earnings and its dividend will rise in 2021. Estimates for this year put the stock on 11 times forecast earnings, with a 2.9% dividend yield.
However, although profits are expected to rise this year, forecasts suggest they will still be lower than in 2019. Earnings aren’t expected to rise above 2019 levels until 2022.
In my view, Barclays and Mr Staley still have a lot to prove. But the shares look affordable to me at current levels. Over time, I expect further gains. I’d certainly be comfortable buying and holding Barclays shares today.
