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The Barclays (LSE:BARC) share price is at its highest point in over a decade. Earnings are strong, driven by what are, in relative terms, higher net interest margins and a resurgence in profits at its investment bank.
Earlier in the week, Barclays announced its results for the second quarter, surprising markets by beating profit expectations and unveiling a £1bn share buyback.
The bank reported a pre-tax profit of £2.5bn, surpassing the consensus of £2.23bn, while group revenues aligned with projections at £7.2bn.
Key metrics showed return on tangible equity at 13.2%, with earnings per share climbing to 11.7p and the CET1 capital ratio improving to 14%. Investment banking revenues rose 10% year-on-year to £3.3bn, benefitting from heightened market volatility and strong trading income.
The stock is now up 140% over three years, making milestone after milestone. The next price milestone is £4. Is that on the cards? Let’s explore.
Earnings trending upwards
While some analysts were cautious about narrowing net interest margins, there are several things to bear in mind. Firstly, net interest margins are elevated versus where they’ve mostly been since the GFC.
Secondly, banks practice hedging in an attempt to smooth out fluctuations in the interest rates. For example, banks buy bonds as a relatively space to park their depositors. But with interest rates higher, banks can replace those mature bonds with lower yields with much higher rates today.
That’s just one way the bank can continue to benefit even if interest rates fall further.
More broadly, the forecast sees earnings per share rising from 38p in 2024 to 40p in 2025 and then 50p in 2026 and 60p in 2027. The result is a forward price-to-earnings (P/E) ratio falling from 8.9 times in 2025 to 6.3 times in 2027.
So, how does this compare with other banks? Well, I’d suggest most UK are trading in line with each other. Some may have weaker growth forecasts, some may have higher dividend yields, but they all appear to be in the same ballpark.
The bottom line
I’m continuing to hold my Barclays shares, the majority of which I bought around the Silicon Valley Bank Crisis. Adding to this investment may lead to concentration risk in my portfolio — coupled with a sizeable holding in Lloyds. However, I do believe its worth considering for long-term investors looking to gain exposure to a well-run British institution.
What’s more, the investment thesis then was a lot more attractive even though I’d expect to more share price appreciation in the coming years if Barclays delivers on the forecasted earnings.
However, I’m going to be a little disappointing here. I’m not sure when Barclays will hit £4 a share. With the stock market getting hotter in places, I wouldn’t be surprised to see the market pull back in the near term.
