Sometimes, when a inventory rallies exhausting over the area of a yr or extra, it has the potential to change into overvalued. So when some traders see the 67% soar within the Barclays (LSE:BARC) share price during the last yr, some would possibly low cost it as a viable funding. Nonetheless, this isn’t all the time the case!

Causes for the rally

Barclays did effectively in 2024, and has been outperforming ever because the Financial institution of England base fee began to rise to take care of the post-pandemic-induced inflation bump. To start with, rising rates of interest helped to extend the web curiosity margin for the financial institution. This refers back to the distinction between the speed it lends out at versus the speed it pays on deposits.

Final yr, rates of interest stayed increased than many anticipated. The UK financial system was resilient and in direction of the tip of the yr inflation began to maneuver increased once more. This meant that the share price elevated as traders needed to issue within the internet curiosity margin staying increased than beforehand thought.

The enterprise has been working exhausting to scale back prices. Proof of that is the £1bn+ cost-saving plan involving some job cuts and an effectivity drive. This has been obtained positively by shareholders. Even when income stays the identical however prices decreaase, it ought to increase earnings. On condition that the share price is impacted by profitability, the next determine on the underside line of the accounts helps to extend the inventory price.

All of this has pushed the inventory to the very best stage in a decade.

Can it nonetheless be thought-about low cost?

When taking a look at some valuation metrics, Barclays shares may not be costly. For instance, take into account the price-to-earnings (P/E) ratio relative to another international friends.

The Barclays P/E ratio is 8.52. Earlier than we even do a comparability, that is under the honest worth benchmark determine of 10 I exploit, suggesting it’s nonetheless undervalued. Goldman Sachs has a ratio of 14.17, Financial institution of America at 13.25 and Citigroup at 12.86. Barclays remains to be valued a lot decrease than these related international banks.

Subsequent, let’s take the price-to-book ratio. For Barclays, the ratio’s 0.63. A traditional determine can be 1. This is able to imply the market worth of the inventory is similar because the guide worth. For a financial institution, I’d anticipate this to be at 1, given the guide worth is basically made up of typical property and liabilities (eg money, loans, and many others) that may be valued simply. The low ratio presently means I really feel the share price may rally to ensure that the ratio to maneuver nearer to 1.

A holitisic imaginative and prescient

In fact, valuation metrics have to be used together with different info when making a monetary determination. It’s true that the financial institution has dangers, such because the latest reputational harm brought on by multi-day outages and cost points. If this retains occurring, it may critically undermine belief within the firm.

But general, I believe the inventory is verging on being a discount and is one for traders to contemplate.