For a 300-year-old institution, Barclays Bank (NYSE:BCS) sure displayed a fair amount of vim and vigor in 2006. Shares of Britain's third-largest bank in terms of assets climbed more than 44% in the past year, just outpacing the 43% gain by competitor Lloyds TSB (NYSE:LYG) and trouncing the 19% increase in shares of giant HSBC Holdings (NYSE:HBC).

Of course, part of these gains can be attributed to rumors of a possible bid for Barclays by U.S. banking behemoth Bank of America (NYSE:BAC) ... rumors that Bank of America CEO Kenneth Lewis has half-heartedly refuted by saying that the bank had "no strategic imperative" to do a deal in Europe.

Now, I'm not one to pooh-pooh such rumors, but I prefer to base my investment decisions on a company's fundamentals, and Barclays Bank certainly seems to be firing on all cylinders. For the six-month period ended June 30, 2006, the company reported revenue of $20.5 billion (based on an exchange rate of one British pound to $1.866), up 38% from last year's period, driven by strong trading volumes and a one-time gain of roughly $444 million. Pretax profits climbed some 37% to $6.8 billion, 8% ahead of analyst expectations, fueled by strong growth in investment banking (up 66%), asset management (up 51%), and international banking (up 210%). This strength was partially offset by a 14% decrease in profits of the credit card business, caused by an increase in bad-debt provisions. That remains an area for investors to keep an eye on, even though management recently said that the situation had stabilized.

I know, I know -- this is not exactly an apples-to-apples comparison, because of the inclusion of Absa, South Africa's largest bank, which Barclays acquired last July. However, I'd hasten to point out that if you strip out Absa's contribution, Barclays still posted a 23% gain in revenue and a 23% increase in pretax profit. I would also like to mention that management recently expressed confidence that the company's results for the full year of 2006 would be in line with Street estimates, which have risen from $4.68 per share three months ago to approximately $5.22 currently.

Pretty impressive stuff, eh? Well, it's my Foolish opinion that Barclays should have another good year in 2007, for three reasons:

  • The company's leadership position in the U.K. banking market. Who hasn't realized that London is overtaking New York as the world's financial center?

  • The strength of the company's asset-management business. Barclays Global Investors currently has $1.7 trillion under management.

  • An expansion into new markets. For example, Barclays just announced that it will soon launch commercial and retail banking services in India.

Analyst Jason Napier of Deutsche Bank obviously agrees with the optimistic outlook. He writes in a recent report that he expects adjusted earnings to grow by 20% in 2007, with upside potential coming from the company's U.K. retail and business-banking segments, as well as from a rebound in the credit card division.

Interested yet?

Consider this: Despite the run-up in the stock over the past year, shares of Barclays remain attractively valued. They're trading at 10 times 2007 estimates of $5.79, a slight discount to the company's long-term growth rate and below the multiple afforded slower- growing peers such as Citigroup (NYSE:C). I also like that the shares offer a sweet 3.5% yield -- did I mention that the dividend payout was increased 14% in the most recent period? What's more, with most of its revenue denominated in pounds sterling, Barclays acts as a de facto bet against the declining dollar.

You get my drift. I believe that Barclays Bank offers one of the best risk/reward ratios among the major banks, and I would urge investors to consider making a deposit in shares of this venerable institution.

For related Foolishness:

Like Barclays, Bank of America offers its shareholders a dividend. That's one of the reasons Bank of America has been recommended in our dividend-focused newsletter, Motley Fool Income Investor. Want to read more? Try out the service free for 30 days.

Lloyds is a Motley Fool Inside Value recommendation.

Fool contributor Will Frankenhoff is enjoying his time writing for the Fool more than reading The Financial Times, rooting for the Jints, or taking a nap. He welcomes your feedback at elves1us@yahoo.com and does not own shares in any of the companies mentioned above. The Fool has a disclosure policy.