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Jonathan Poland
Jonathan Poland
Articles (455)  | Author's Website |

Barclays Is the Best Bargain in European Banking

Buying the second-largest bank in the UK could be like buying Bank of America under $10 in 2012

November 29, 2018 | About:

Brexit has dragged on and dragged down many of the banks across Europe. UBS (NYSE:UBS), Royal Bank of Scotland (NYSE:RBS), Llyod's (NYSE:LYG) and Credit Suisse (NYSE:CS) all look undervalued. Compared to the rest, however, Barclays (NYSE:BCS) offers the best value and potential for capital appreciation.

The U.K.-based bank generates over $26 billion in revenue annually, and has been getting back on track after its $2 billion settlement with the Department of Justice in March for mortgage securities fraud. In the first nine months of its fiscal year, pretax earnings were 5.3 billion pounds ($6.7 billion), an increase of 23% thanks to lower impairment charges and lower operating expenses.

Going forward into 2019, the bank expects to earn close to $1.20 per share - a number that could be higher if the pound sterling moves back to a more normalized level (1.60 per U.S. dollar) as Brexit is finalized. Dividends are also set to get back to normal with a projected yield above 3% for next year.


The market capitalization looks paltry at just $36.5 billion, especially since Barclays is the second-largest bank in the U.K. with north of $1.5 trillion in assets. Compared to the major banks here in United States, the company looks ludicrously cheap. Barclays' forward price-earnings ratio of 7.5 is 45% lower than Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC). Based on book value, Barclays is trading at 50% to 70% discounts to those banks. Even compared to U.K. peers like Lloyd's and Royal Bank of Scotland, Barclays trades at lower book and forward earnings multiples.

While the bank is exposed to some downside Brexit risk, over 50% of its income is generated domestically in the U.K., and 35% from the United States. Restructuring and litigation costs are behind it, so if this turnaround continues on trend, the stock is poised for a double with or without help from Brexit. Once the U.K. and Europe outcome is over and the region can stabilize under new changes, each of its financial institutions will be able to plan longer term. This will mean higher conversion rates for pounds to dollars. This will likely happen sooner rather than later, which is why now is the time to buy.

Disclosure: I am long LYG.

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About the author:

Jonathan Poland
I used to manage money. I still publish my thoughts on stocks here on GuruFocus, mainly on big cap companies. I rarely write about stocks that I own. Thank you for reading.

Visit Jonathan Poland's Website

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