In the world of investing, everyone loves a good deal. And with that in mind, I can’t help finding myself drawn to question of whether Lloyds (LSE:LLOY) shares are the greatest bargain on the FTSE 100.
A tale of twists, turns, and volatility
Once soaring to lofty heights prior to the global financial crisis, the bank’s share price took a sharp nosedive during the economic downturn, prompting a government bailout.
Subsequent years saw gradual recovery, but Lloyds’ valuation remained vulnerable to economic uncertainties, regulatory changes, and challenges within the banking sector.
Over time, Lloyds worked to strengthen its financial position and recover from the crisis.
The UK government gradually reduced its ownership stake in the bank through a series of share sales to private investors.
By 2017, the government had sold all of its remaining shares, returning the bank to full private ownership.
But then came the coronavirus pandemic. And like many financial institutions, Lloyds faced unprecedented challenges stemming from lockdowns, economic uncertainty, and low interest rates.
Fast forward to today and Lloyds shares trade around the 44p mark. While this is 20p more than their lowest point in the pandemic, I’m still convinced they offer significant value.
A positive outlook for UK-listed banks
Last month, analysts at Shore Capital reiterated their buy ratings on six UK-listed banking stocks, including Lloyds. They believe the market is currently pricing in a worse outlook than necessary, and I’m inclined to agree.
While higher interest rates mean more expensive borrowing costs, which can reduce demand among banks and other financial institutions to borrow money, Lloyds has actually benefitted from the high-rate environment.
Its focus on traditional banking means the group is more exposed to the interest rate cycle than other competitors. In fact, 76% of total income is interest related.
This has resulted in substantial growth driven by higher net interest income, propped up by the higher UK base interest rate.
However, the flip side to this is greater exposure to potential loan defaults.
As interest rates rise, borrowers may face higher interest costs on variable-rate loans, which increases the likelihood of defaults. This exposes Lloyds to credit risk, particularly if borrowers cannot meet their higher repayment obligations.
High performance, low valuation
Nonetheless, in July 2023, Lloyds reported a robust financial performance with strong net income and capital generation as well as resilient asset quality.
Net income rose by 11% to £9.2bn, although net interest margin (a measure of profitability in borrowing/lending) fell to 3.14%. That said, it’s reassuring to me that the drop was less than markets were expecting.
With a relatively low P/E ratio of 6.1 and a handsome dividend yield of 5.4%, I find it hard not to conclude that Lloyds is genuinely one of the best FTSE 100 bargains.
That kind of yield could provide me with a steady, albeit not guaranteed, stream of income in the form of dividend payments, which I could then reinvest to reap the benefits of compounding returns over time.
All things considered, if I had some cash to spare, I’d buy a handful of shares in heartbeat.
