Since the banking crisis in March, shares in Lloyds Banking Group (LSE:LLOY) have been stuck below 50p. The stock currently trades at a price-to-earnings (P/E) ratio of five and has a dividend yield close to 6%.
As Warren Buffett says, the stock market is a voting machine in the short term and a weighing machine in the long term. So should investors look to buy the stock before the end of the year while it looks like a bargain?
Interest rates
So far, 2023 has been a terrific year for Lloyds. The company makes money by receiving interest on its loans and rising interest rates have allowed the company to earn a higher return from its lending operations.
The bank has also had to pay out more in interest on customer deposits and investors will need to keep a careful eye on this. But so far, the gap between the amount Lloyds pays and the amount it earns has widened.
For 2023, the company is targeting a net interest margin of 3.1%. That’s higher than the 2.4% it achieved in 2022 and almost double the 1.7% margins of 2021.
Higher rates have been positive for UK banks in general and investors should note that what goes up can also come down. But Lloyds has benefitted more than its peers for a couple of reasons.
One is that it has the largest market share, at around 24%. Another is that, unlike Barclays, its profits haven’t been impeded by the slowdown in investment banking activity.
Valuation
It’s worth noting that Lloyds trades at a slightly higher price-to-book (P/B) ratio than some if its UK peers. In particular, its 0.65 ratio is significantly higher than NatWest, which trades at 0.54.
Lloyds generates a better return on equity (ROE) of 15% compared to NatWest’s 13%. But analysts at RBC argue that this isn’t enough to offset the valuation difference and suggest selling Lloyds shares and buying NatWest.
I’m doubtful of this strategy. Besides a lower ROE, I think there are some good reasons why NatWest shares trade at a multiple than Lloyds.
One is the fact that NatWest is likely to achieve a lower net interest margin this year than Lloyds. After its margin fell below 3% between July and September, the bank withdrew its guidance for a 3.15% spread.
Another is that NatWest is still significantly owned by the UK government — who are actively looking to unload their stake in 2024. This is an issue that Lloyds doesn’t have to contend with.
Should I buy Lloyds shares?
In general, UK banks look like good value to me at the moment. But despite trading at a slightly higher multiple than either Barclays or NatWest, Lloyds is the stock that stands out to me.
The company has benefitted significantly from higher interest rates in 2023. While this is good for the business, investors will want to be aware of the risk of the UK government introducing a windfall tax here.
Despite the risks, I think the stock is worth it at today’s prices. That’s why I’d be happy to buy it for my portfolio while the price stays below 50p.
The post Should investors rush to buy Lloyds shares before the end of the year? appeared first on The Motley Fool UK.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
