The British banking sector is in rude health. Perhaps the most symbolic moment this year, in the late spring, was the return of NatWest to full private-sector ownership. The government, which at one stage owned 84% of the troubled lender, sold a final tranche of shares. However, while NatWest’s shares have continued to do well, it isn’t the most interesting UK bank on the stock market at present. I think you should consider a punt on its rival, Barclays (LSE: BARC), instead.
Despite being one of the few UK banks that wasn’t directly bailed out by the government in 2008, Barclays has faced criticism for the poor performance of its investment-banking division. In recent years there has even been pressure from activist investors to sell, spin out, or otherwise separate the investment-banking side from the retail-banking business. Nevertheless, CEO C.S. Venkatakrishnan (Venkat) has stuck with a hybrid strategy of keeping the investment bank while trying to build up the retail-banking and wealth-management arms.
Soaring profits for Barclays
So far, this strategy appears to be working well, with Barclays’ revenues and profits continuing to increase. Its stated profits are now 125% higher than they were in 2019, and even after adjustments they are still up by two-thirds. Dividends have more than doubled. True, there are some clouds on the horizon, in terms of ongoing litigation over the departure of disgraced boss Jes Staley, exposure to private-credit loan portfolios and possible banking taxes in the upcoming Budget. However, experts believe that the first is a relatively minor problem, while Barclays is well-placed compared with its rivals.
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One big reason to be bullish on Barclays is its valuation. The stock trades at less than eight times estimated 2026 earnings; at a discount of more than a quarter to the value of its net assets; and at a smaller discount to its tangible book value. This makes it cheap, both in absolute terms and relative to its rivals, with NatWest trading at a 2026 price/earnings (p/e) ratio of 8.5, while Lloyds and HSBC both sell for 2026 p/es of 9.5. All three of these banks are priced at significant premia to net assets. The major US investment banks are valued even more highly.
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Barclays’ improving fortunes have certainly caught the imagination of investors: the share price has been on a roll. It has risen by nearly a third over the last six months, making it one of the best performers in the FTSE 100 during this period. It has continued to beat the blue-chip index over the past month and three months, and is also trading above both its 50 and 200-day moving averages. As a result, I would suggest going long at the current price of 405p at £9 per 1p per share. In that case, I would put the stop-loss at 300p, which gives you a total downside of £945.
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