Investment Overview

Barclays has seen a decrease in operating expenses over the past six years, with a negative compound annual growth rate of 2.4%. The company plans to continue cost-saving actions, resulting in gross savings of 1 billion in 2024. By 2026, Barclays aims for total efficiency savings of 2 billion and a cost-to-income ratio in the high 50s. The company has also divested its consumer finance business, acquired Tesco's retail banking business, and sold $1.1 billion in credit card receivables to Blackstone's Credit & Insurance segment.

• Warning! GuruFocus has detected 1 Warning Sign with LSE:BARC.

Bull Case

Barclays' initiatives to improve efficiency over the last few years have been bearing fruit, as evident from a fall in expenses. While total operating expenses increased in 2022 and 2023, the same declined in 2024 alongside a negative compound annual growth rate (CAGR) of 2.4% over the six-year period ended 2021. Overall expenses are expected to remain manageable as business restructuring initiatives continue to provide support. The company intends to undertake further cost-saving actions to improve efficiency. The structural cost actions resulted in gross savings of 1 billion in 2024. The company aims to achieve gross efficiency savings of 0.5 billion in 2025. By 2026-end, management expects total gross efficiency savings of 2 billion and the cost-to-income ratio to be in the high 50s. Barclays has been striving to simplify operations and focus on core businesses. In February 2025, it divested its Germany-based consumer finance business. In November 2024, the company acquired Tesco's retail banking business. The move is expected to complement its existing business and strengthen its position in the market. Further, as part of its business overhaul, the company announced changes to its operating divisions effective first-quarter 2024. In April 2024, it announced the disposal of its Italian mortgage portfolio (completed in the second quarter of 2024). The company has sold $1.1 billion in credit card receivables to Blackstone's Credit & Insurance segment to bolster the lending capacity for Barclays Bank Delaware in the United States. In 2023, Barclays acquired Kensington Mortgage, which bolstered its mortgage business in the United Kingdom. Driven by these initiatives, the company's profitability is expected to improve over time.

Barclays has been rewarding shareholders with enhanced capital distributions. The company has been paying dividends regularly and plans to keep the total dividend payout stable at the 2023 level, with progressive dividend growth. Barclays plans to return at least 10 billion of capital to shareholders between 2024 and 2026 through dividends and share buybacks, with a continued preference for buybacks. Driven by a solid balance sheet position, the company's sustainable capital distributions will likely enhance shareholder value. Shares of Barclays have outperformed the industry over the past year. The Zacks Consensus Estimate for 2025 has been revised 5% upward over the past week. Moreover, its current price-to-book and price-to-earnings (F1) ratios are lower than the industry averages. Also, it has a Value Score of B. Thus, given the strong fundamentals and positive estimate revisions, the company's impressive price performance is likely to continue in the near term.

Valuations

Based on a DCF Valuation, the fair value of Barclay's stock price is $40.95. Due to a structural hedge, the company expects UK net interest margins to peak in 2026. Additionally, the company expects 2% loan growth and 70 basis point impairment losses over the medium term. In 2026, the midcycle return on tangible equity is 9%, while the cost/income ratio falls from 63% in 2024 to 59%. This is in contrast to an 11% cost of equity assumption.

Bear Case

Barclays' core operating performance remains unsatisfactory. Net interest income (NII) and net fee, commission, and other income have been witnessing a volatile trend over the last several quarters owing to a challenging operating backdrop. Though NII and net fee, commission, and other income rose in 2024 on the back of structural hedges, the uncertainty about the performance of the capital markets might weigh on the company's top line, which makes us apprehensive about its growth prospects. Rising credit impairment charges are another major concern for Barclays. The company witnessed a significant rise in credit impairment charges in 2020 to 4.8 billion, though there was a credit impairment release of 653 million in 2021. Nonetheless, the metric has been on the rise since 2022. Because of the tough operating environment, credit impairment charges are expected to remain elevated in the near term. Barclays' trailing 12-month return on equity (ROE) undercuts its growth potential. Its ROE of 7.74% compares unfavorably with the ROE of 12.05% for the industry. This reflects that it is less efficient in using shareholders' funds.

Notable Hedge Fund Bets

Sarah Ketterer (Trades, Portfolio)'s firm has invested in Barclays via their Global Value Equity fund which had net return of 13.8% in 2024. Even though the magnitude of the stake is not significant, however, when a US-based deep value investor taps a foreign company in order to not only diversify but also profit off the undervaluation, it speaks volume of the company. And this is indicative of the lucrative fundamentals Barclays has to offer to investors

Final Thoughts

Over the last six years, Barclays' operational expenses have decreased at a negative compound annual growth rate of 2.4%. The business intends to keep cutting expenses, which will save 1 billion in gross savings by 2024. Barclays wants to achieve a cost-to-income ratio in the upper 50s and overall efficiency savings of 2 billion by 2026. Additionally, the company sold $1.1 billion in credit card receivables to Blackstone's Credit & Insurance division, sold its consumer finance division, and bought Tesco's retail banking division. The fundamental operational performance of Barclays is still inadequate. A difficult operating environment has caused a variable trend in net interest income (NII) as well as net fee, commission, and other income during the past few quarters. Even though structural hedges helped NII and net fee, commission, and other income increase in 2024, we are concerned about the company's growth prospects because the performance of the capital markets could have a negative impact on its top line.