A giant of the UK banking industry, Lloyds Banking Group (LSE:LLOY) is a constituent of the FTSE 100 index. Currently trading at 43.7p, it’s in prime penny stock territory. While I don’t currently own shares in the company, should I be buying at these low levels? Let’s take a closer look.
Why Lloyds shares may be cheap
By referring to trailing and forward price-to-earnings (P/E) ratios, I can better understand if a company is currently under- or overvalued. These ratios are found by dividing a share price by earnings, or forecast earnings for forward P/E ratios.
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Lloyds has trailing and forward P/E ratios of 6.41 and 7.12, respectively. These are lower than two major competitors. HSBC, for instance, has trailing and forward ratios of 10.96 and 8.8. Also, Standard Chartered registers 11.39 and 8.26.
This may suggest that the Lloyds share price is lower than we might expect. It may therefore be a bargain at current levels.
Interest rate hikes
The macro environment going forward may also be favourable for the company. The Bank of England increased interest rates yesterday from 0.75% to 1%. While this is still historically low, more hikes can be expected in the near future.
Interest rates are important when analysing a banking business because they have an impact on how much the bank can charge for loans and mortgages.
As interest rates rise, Lloyds will likely charge customers more for borrowing services. Additionally, around three-quarters of Lloyds loans are mortgage-focused, so the business has large exposure to the UK housing market.
There has been some speculation that rising inflation and energy bills will act as deterrents to potential homeowners. This could lead to a decline in customers seeking mortgages.
However, UK housebuilder Taylor Wimpey recently stated that it doesn’t foresee a decline in demand for housing.
Strong financial results
Financial results are also showing improvement. For the three months to 31 March, the company reported profit before tax of £1.6bn. While this was lower on a year-on-year basis, it was higher than the forecast £1.4bn.
Despite this, CEO Charlie Nunn commented that the outlook within the UK banking market was still “uncertain”.
However, Lloyds has rebounded strongly from the difficulties it faced during the pandemic, although it should be noted that past performance is not necessarily indicative of future performance. For 2021, it posted revenue of £37.4bn. This was an increase from £29bn in 2020.
Over the same time period, profit before tax rose from £1.2bn to £6.9bn. This is a testament to the strength of the underlying business.
Overall, I think the operating environment and rising interest rates could be a good opportunity for the company. It is therefore conceivable that the Lloyds share price could rise in the near future. I will be buying shares soon for the benefit of my long-term portfolio.