Lloyds (LSE:LLOY), Barclays, HSBC, NatWest, and Standard Chartered all reported their first-quarter earnings recently.
On the whole, the picture painted was one of a positive and improving outlook in my view.
After all, the banking sector has been under immense scrutiny in recent months.
This was largely sparked by high-profile bailouts in the US and Europe. Nonetheless, it looks to me like the issues currently facing US banks aren’t causing as much stress in the UK.
What’s more, some British banks like Lloyds maintain strong and healthy levels of capital.
With that in mind, here’s why I’m convinced Lloyds shares earn their place among the FTSE 100‘s best bargains.
A solid set of financial results
Earlier this month, the group became the latest UK lender to exceed quarterly profits forecasts. This came as earnings surged on the back of higher interest rates.
The bank posted first-quarter pre-tax profit of £2.26bn, up 46% and better than the £1.95bn average of analyst forecasts.
In addition, net income generated after deposit payouts rose 15% to £4.7bn.
However, it wasn’t a complete picture of good news.
I was slightly concerned to hear that deposits fell sharply by £2.2bn to £473.1bn. This included a reduction in retail current account balances of £3.5bn.
According to Lloyds, this was partly driven by seasonal customer outflows, including tax payments, higher spend, and a more competitive market. Nonetheless, each one represents a risk moving forward.
Cheap shares and a healthy dividend yield
Despite a robust set of financial results, I think Lloyds shares look significantly undervalued.
To illustrate, the bank’s price-to-earnings (P/E) ratio sits at a modest 6.3. For the sake of comparison, HSBC, NatWest, and Standard Chartered have P/E ratios of 10.1, 7.3, and 7.9 respectively.
On top of this, Lloyds boasts an attractive dividend yield of 5.1%, which exceeds that of Barclays, HSBC, and Standard Chartered.
The group’s strong capital position should ensure that dividends are well covered for now. That said, nothing is ever guaranteed on that front.
An improving outlook for Lloyds
Looking ahead, I think Lloyds shares look primed to benefit from an improving economic outlook for UK banks.
Across the entire sector, the worrying trend of default expectations getting materially worse looks to have paused as impairment charges were largely better than analysts expected across the board.
Moreover, the helpful interest rate environment is very good news for the group since Lloyds’ focus on traditional banking means it’s more exposed to the interest rate cycle than others.
This represents a crucial risk with Lloyds, but I’m reassured by bank’s ambitious plans to grow its wealth management options across asset management, general insurance, and pensions businesses.
Investment in these segments is expected to peak in 2023 and since they’re less linked to interest rates, I think it’s likely that Lloyds will be able to reduce its exposure to the negative aspects of the interest rate cycle in the long run.
As a result, I’d happily hoover up some cheap Lloyds shares for my portfolio if I had some spare cash lying around. For the reasons outlined above, I reckon they’re perhaps the best FTSE 100 bargain on offer today.
