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.
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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