Is Lloyds the best UK banking stock to buy right now?

Lloyds stock is down 6% year-to-date. This Fool assesses whether he thinks it’s a better buy than its British banking peers.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Man putting his card into an ATM machine while his son sits in a stroller beside him.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Interest rates have been on a steady rise over the last 12 months and are currently sitting at 5.25%. It’s no secret that the UK banking sector’s performance is closely linked to this number, and Lloyds (LSE: LLOY) stock stands out to me as a leader in its field. As such I believe it could be a solid addition to my portfolio at its current price of 44p. Let’s investigate why.       

Opportunity for future growth

Lloyds currently trades at a price-to-earnings (P/E) ratio of just 5.5. To put this into perspective, the FTSE 100 average P/E ratio stands at 14, highlighting the significant discount at which Lloyds shares are trading. When comparing this to established UK player HSBC, which trades on a higher P/E ratio of 6.5, I also see value.

This figure implies that the market may be undervaluing the company’s earnings potential. As an investor looking for opportunities with strong upside potential, this certainly turns my head.

In addition to this, the bank has delivered stellar results so far in 2023. For the first six months of 2023, it delivered £9.2bn in net income, an 11% increase compared with the same period in 2022. Profit after tax rose by 17% year on year, demonstrating solid margin expansion. In today’s tricky market, results like this give me confidence.

A high-yielding stock

Lloyds also offers an attractive income proposition. It currently offers a dividend yield of 5.7%, significantly surpassing the FTSE 100 average of 3.8%. It’s also significantly higher than competitor Barclays, which currently has a yield of 4.8%.

This robust dividend yield reflects the company’s commitment to returning value to its shareholders. In a volatile market environment, finding attractive income-generating assets is essential, and Lloyds stands out as a source of steady income.

A double-edged sword

As the UK’s largest mortgage lender, the bank does face headwinds in a challenging macroeconomic environment. Factors such as rising inflation and interest rates can impact homeowners, potentially affecting its ability to service mortgages. Additionally, uncertainty surrounding the property market could lead to fluctuations in housing prices, affecting Lloyds’ mortgage portfolio value.

However, higher rates also allow the bank to charge more on its loans, generating higher interest income. For H1 23, its net interest margin expanded by over 0.4% when compared with the prior year. This leads me to believe that higher rates are benefiting Lloyds.   

The bottom line

As of today, it’s my top pick in the UK banking sector. Its low valuation, high dividend yield, and strong earnings performance make it a compelling option for my portfolio.

While the macroeconomic environment poses challenges, especially given its significant exposure to the UK housing market, I believe the upside from rising rates will counteract this threat. As such, I’m looking to add this stock to my portfolio today.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, 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.

More on Investing Articles

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Down 11%, a brilliant FTSE 250 growth stock I’d buy on the dip!

I think Games Workshop shares are a brilliant dip buy following last week's slump. Here's why it's one of my…

Read more »

Middle-aged black male working at home desk
Investing Articles

Are these top-traded FTSE 100 shares the best to buy for 2024?

The market has disagreed with me pretty much all year on the best buys among FTSE 100 shares. But, are…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

My five favourite forms of passive income

I've been looking for ways to pump up my passive income, so I can retire richer. But which of these…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

What’s the FTSE 100’s best 10% dividend yield?

Depressed prices have thrown up some golden opportunities on the FTSE 100. Which of these 10%-yielding Footsie stocks should I…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

BP shares look dirt cheap

Are BP shares a brilliant bargain? The financials look excellent and it’s hard not to call them anything other than…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

My 12 fears for the stock market in 2024

After a terrific year for global stock markets in 2023, what can I look forward to in 2024? As a…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

2 income shares for bumper dividends in 2024

I own these two income shares for their outstanding ability to deliver billions of pounds of cash dividends each year…

Read more »

Investing Articles

Could the IAG share price hit £2.11 in 2024?

According to analysts, the IAG share price could be headed for £2.11. But Stephen Wright wonders whether the stock is…

Read more »