Barclays (LSE: BARC) has seen its share price fall 9% from its 1 August 12-month traded high of £2.41.

The move was driven by that day’s 0.25% cut in UK interest rates to 5% from their 16-year high. It was followed on 19 September by the Bank of England Governor’s comment that he is optimistic “interest rates are going to come down”.

Lower rates are likely to result in a reduction in Barclays’ net interest margin over time. This is the difference between interest received from loans and paid on deposits. It remains the key risk for the bank, in my view.

However, I think there are other factors that give the UK ‘Big Four’ bank considerable buying appeal.

Strong growth outlook from a new plan

One is a new three-year plan announced in February designed to improve Barclays’ operational performance. It also aims to drive higher returns, and predictable, attractive shareholder distributions.

More specifically, by end-2026, it targets income of around £30bn and a return on tangible equity (ROTE) of 12%+. Unlike return on equity, ROTE excludes intangible elements such as goodwill.

The bank also aims to distribute over £10bn of capital to shareholders through buybacks and dividends.

A key element in achieving these goals is the simplification of the bank’s organisation into five main divisions. In this vein, it recently confirmed the sale of its Italian mortgage and German consumer finance businesses.

These changes should also enable it to achieve its target of total gross efficiency savings of around £2bn over the three years.

How’s it doing so far?

H1 2024 results reflected the costs of this reorganisation, with total operating expenses up 1% year on year to £8.2bn. Income was down 2% year on year at £13.3bn and ROTE was 2.1% lower at 11.1%.

In terms of shareholder rewards, it completed the £1bn buyback announced with its 2023 results. It also announced a further £750m buyback and increased the interim dividend by 7% to 2.9p from 2.7p.

Any stalling in the implementation of this plan remains another risk for the bank.

However, as it stands, consensus analysts’ estimates are that its earnings will grow by 12.8% each year to end-2026.

Are the shares cheap?

Growth in earnings ultimately power a firm’s share price and dividend higher. And Barclays already looks very undervalued – another major positive for me.

On the key price-to-book ratio (P/B) measure of stock valuation, it trades at just 0.5.

This is joint bottom of its competitor banks (with Standard Chartered), which have an average P/B of 0.7. So, it looks cheap on this basis.

In hard cash terms, a discounted cash flow analysis shows the stock to be 64% undervalued at the current price of £2.20.  

So a fair value for the shares would be £6.11. They may go lower or higher than that, but it highlights how cheap they look right now.

Will I buy them?

I already own two other banking stocks (HSBC and NatWest), so buying another would unbalance my portfolio.

If I did not have these, I think Barclays would be a good buy for me, given its low valuation and strong growth prospects.