Barclays (LSE: BARC) shares have soared 48% in a year and are among the FTSE 100’s strongest performers. Yet despite that impressive run, the stock still trades on a modest price-to-earnings ratio of 11. So what’s the market worried about — and could those fears be creating an opportunity for investors today?
What is the market worried about?
Despite the strong share price performance, investors may be reluctant to place a much higher valuation on the blue-eagle bank. Unlike many FTSE 100 companies, banks are very exposed to the economic cycle, meaning today’s profits may not be sustainable if conditions deteriorate.
For example, a weaker economy could lead to slower loan growth and higher levels of customer defaults, increasing the amount it has to set aside for bad debts.
Interest rates are another key factor. While higher rates have boosted profitability across the banking sector in recent years, that tailwind may fade if borrowing costs continue to fall.
There are also company-specific risks to consider. Barclays’ investment banking division has delivered exceptional earnings amid recent market volatility. But earnings from trading and dealmaking activities tend to be less predictable than those of a traditional retail bank.
The group recently took a £228m charge linked to a fraud case, highlighting how unexpected costs can emerge even when a business is performing well.
Taken together, these factors may help explain why some investors remain cautious despite the stock’s impressive rally.
Could the market be too pessimistic?
Despite those risks, there are reasons to believe Barclays may deserve a higher valuation than it currently receives.
Over the past two years, the bank has become a much simpler and more focused business. Last year it delivered £700m of gross efficiency savings, around 40% ahead of its target, while also completing the disposal of several non-core assets.
Those improvements appear to be feeding through to profitability. In the first quarter, Barclays generated a 13.5% return on tangible equity despite absorbing a £228m fraud-related charge. Revenue increased 6% year on year to £8.2bn and the cost-to-income ratio improved to 56%.
Importantly, management remains confident in its medium-term targets and plans to return at least £15bn to shareholders through dividends and buybacks by 2028. That suggests today’s earnings strength is not simply the result of a favourable quarter, but part of a broader strategy aimed at delivering higher and more sustainable returns.
Perhaps most encouragingly, the bank says it currently sees no signs of credit weakness across its UK consumer, corporate, or US consumer lending businesses. If economic conditions remain reasonably stable, Barclays may be able to continue generating strong profits without requiring a dramatic improvement in the operating environment.
My takeaway
The market clearly remains cautious on Barclays, and some of those concerns are understandable.
However, the combination of improving efficiency, strong profitability and significant planned shareholder returns suggests the bank may deserve more credit than it’s currently getting.
After a 48% gain, I wouldn’t describe the shares as a screaming bargain, but I still think they’re worth considering at today’s valuation.
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Andrew Mackie does not hold any positions in the companies mentioned.
