Barclays shares (LSE: BARC) have been among the FTSE 100’s best performers over the past year. Yet, despite that impressive run, I keep coming back to the same question: why does the stock still trade on a price-to-earnings (P/E) ratio of just 10.6?
That’s the sort of valuation investors might expect from a struggling business, not one that’s been outperforming the market while returning billions to shareholders through dividends and buybacks.
So is the blue-eagle bank genuinely undervalued, or is the market spotting risks that I’m overlooking?
Why is Barclays so cheap?
Part of the answer is that investors remain cautious about banks.
Unlike many FTSE 100 companies, the lender’s profits are closely tied to the health of the economy, interest rates, and credit conditions. It also recently took a £228m charge linked to a fraud case, highlighting the unexpected risks that can emerge in financial services.
However, the latest results suggest the business is becoming structurally stronger. First-quarter revenue rose 6% to £8.2bn, while return on tangible equity (RoTE) reached 13.5%. This was comfortably ahead of management’s target of more than 12% for 2026.
The group also remains on track to return at least £15bn to shareholders by 2028 through dividends and share buybacks. With all five divisions generating double-digit returns and management targeting a RoTE above 14% by 2028, the shares may deserve a higher valuation than they currently command.
Why could the valuation eventually rise?
What caught my attention was the growing visibility over future earnings.
Net interest income (NII) excluding the investment bank and head office increased for an eighth consecutive quarter, while management reiterated guidance for more than £13.5bn of group NII this year.
Even more encouragingly, the bank has now locked in £18.3bn of structural hedge income between 2026 and 2028. According to management, around 95% of next year’s hedge income is already secured.
That matters because one reason banks often trade on low earnings multiples is that profits can be volatile. By contrast, these figures suggest a significant portion of future income is becoming more predictable.
What could go wrong?
Despite the improving outlook, there are still good reasons why investors are cautious.
Management itself is becoming more defensive in certain areas. It’s reducing exposure to highly leveraged corporates and selectively pulling back from parts of structured finance and private credit. That suggests it’s seeing early signs of rising risk in parts of the credit market, even if no broad deterioration has yet emerged.
There is also the reminder that banking risks can appear suddenly. A £228m fraud-related charge in the securitised products division highlights how quickly losses can emerge, even in areas that appear well controlled.
More broadly, some of the recent strength in earnings has been supported by interest rate conditions and structural hedging benefits. If those tailwinds fade over time, the current level of profitability may prove harder to sustain.
For me, that makes it more of a ‘watch and understand’ stock than a straightforward buy right now — especially given my existing exposure elsewhere to the sector.
But for investors underweight UK banks, it’s a name that arguably still deserves a place on the radar.
Should you invest £5,000 in Barclays Plc right now?
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Andrew Mackie does not hold any positions in the companies mentioned.
