Can Lloyds shares really get any cheaper now?

Fresh interest rate fears are putting the squeeze on mortgage lenders. But Lloyds shares are holding up, and I rate them as a strong buy.

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When the Barclays boss raised new mortgage fears this week, Lloyds Banking Group (LSE: LLOY) shares didn’t really budge.

Barclays’ chief executive CS Venkatakrishnan spoke of a huge income shock when borrowers reach the end of their fixed-term deals.

Lloyds is the UK’s biggest mortgage lender, so that’s got to hurt, right? The fact that nothing much happened to the price makes me think they really might have hit rock bottom.

As the folk who pay too much attention to share price charts say, maybe Lloyds shares have strong support.

Past the bottom?

I see good reasons to think so, and not just looking at the chart.

Forecasts put Lloyds shares on a price-to-earnings (P/E) ratio of only 6.4, with a dividend yield of 5%. Other things equal, that looks super cheap.

It makes me think of something billionaire investor Warren Buffett once said:

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Would he think Lloyds is a wonderful company, and might he buy? Well, he’s invested heavily in bank stocks over the years.

Super returns

Together with insurance and other financials, they’ve helped him to an average annual return of 20% since 1965. What about Lloyds? I don’t know, but I can’t help thinking he might like it.

And isn’t it even better to buy a wonderful company at a knock-down, super-cheap, no-brainer, wonderful price?

I’m begging the question here a bit. The big City investors clearly don’t see the Lloyds share price as all that wonderful. If they did, they’d have piled in and pushed it much higher.

First quarter

How wonderful might Lloyds be? In Q1 this year, profit before tax reached £2,068m. That’s £611m more than the same quarter last year.

Net interest income reached £3,542m, up 21%. So high interest rate margins are helping offset pressure on mortgage demand. There’s a risk that the balance might shift the wrong way though.

But right now, it seems to be giving Lloyds a bit of a safety buffer.

Liquidity looks fine

The balance sheet looked strong too, with total assets up £740m compared to December 2022. Total liabilities were down £2.6bn.

And the bank’s CET1 ratio is on the up, from 14.8% in December to 15% by March. That gives a handle on how much of its equity can be quickly converted to ready cash.

Liquidity like that, regulated by the PRA, helps protect UK banks from the falls we’ve see over in the US. And I see that as one extra bit of safety.

Further falls?

It seems almost certain that the Bank of England will raise interest rates further. In fact, some think they could exceed 5% before they start to cool. And that must add risk for Lloyds’ mortgage business. It might upset the balance.

So I think Lloyds shares could get even cheaper this year.

But you know who thinks they’re good to buy now? Yes, Lloyds itself, snapping them up as part of a share buyback.

I agree, and I want to buy more.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has positions in Lloyds Banking Group Plc. 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.

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