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After spending the best part of a decade in the doldrums, investors have become increasingly optimistic about the prospects for Barclays (LSE: BARC) shares. The share price might have risen over 200% in the past five years, but with net interest income expected to march higher, I maintain there’s a lot of value left in the stock.
Analyst forecasts
I must admit I generally take analyst share price predictions with a pinch of salt. They are, after all, just guesses. But with a Buy or Outperform rating from 13 out of 17 analysts and with not one Sell rating, I’d be foolish to ignore general sentiment.
One thing I’ve learnt over the years is that momentum can keep a stock moving higher for a lot longer than anyone originally envisaged. The median share price target from analysts is 367p, with a high of 405p and a low of 323p.
There are clearly a number of reasons to be bullish on the stock at the moment, not least bumper shareholder distributions totalling £10bn between 2024 and 2026. However, one important point to note is that it intends to keep the dividend broadly flat during that timeframe. Dividend per share growth will come predominantly from a lower share count.
Bond yields
Recently the yield on long-dated UK government debt has increased significantly. A 10-year bond (or gilt) currently yields 4.6%, up 9% on a year ago. A similar trend has emerged in the US Treasury market. Rising long-term inflation expectations and the imposition of tariffs stunting global growth are two of the main causes of the rise.
One important consequence of this increase has been what’s known as a steepening in the yield curve. This phenomenon happens when the difference between the yields on long and short-term government debt widens, or steepens.
Barclays, like every other bank, meets the vast majority of its short-term funding needs from customers deposits. It will then use the deposits to lend or invest in long-term financial assets such as mortgages and bonds. As the difference between the interest rate it pays on current accounts and what it receives on long-dated assets widens, then net interest income (NII) increases, boosting profits.
Recession fears
A steepening yield curve isn’t all good news for banks, however. The 10-year government bond is the lynchpin of the entire economy. Rising yields mean higher borrowing costs for both individuals and businesses, in the form of mortgages and loans. This is hardly a catalyst for economic growth.
There are certainly a lot of warning signs out there at the moment. Consumer spending has definitely slowed, particularly on the luxury discretionary end. Higher gold prices also tell me that the market fears the return of another wave of inflation.
Despite the risks, I believe Barclays is in a much better position than it’s been in the past to weather any potential storm. The balance sheet remains strong and it continues to move risk weighted assets (RWAs) from its more volatile investment banking division into its highest returning UK businesses.
I have been building a position for a number of years and the stock is now one of my largest holdings. With still a lot of value left, I am in agreement with the analysts and remain bullish on its future prospects.
